What If I'm Behind On My Mortgage?
Many
Americans have been going through a difficult time over
the last few years. Life can be very stressful if you, or a member
of your household, have lost your job or taken a cut in pay. If you
are in trouble on your loan, there are multiple options available
to you, both to keep your house and to get out of your situation altogether.
No matter
which path you choose to take, you have to be smart, patient and persistent
if you want the best possible outcome. Pay attention to what the lender
is asking for and get it to them immediately. It's not unusual for
a lender to close down a file on a request for assistance, if they
don't receive requested information within seven days. If your file
is closed, send the information anyway, and then immediately contact
the lender and request that your file be reopened.
Selling
Your House
Keeping Your House
Tax Implications
Tips For Dealing With Your Lender
Selling
Your House
There are
several possibilities if you decide that you want to get out of your
situation completely. The ideal scenario would be to sell your house
for enough money to cover what you still owe on the property. It's
important that a proper Competitive Market Analysis be completed to
determine if this is a realistic possibility. Pricing your property
too high will make it more difficult to sell, even if later on you
drop it to the current market value. You may lose money, and have
a more difficult time negotiating with your lender if needed.
The second
option is to sell your house for less than the amount owed, and pay
the difference out of pocket. The advantage of this is that it will
protect your credit. If you can afford to do it, it may prevent costly
issues later on in many aspects of your life. Credit problems caused
by mortgage issues can make ALL financing more expensive. It could
affect your ability to purchase a car, get a credit card (or one with
a decent interest rate), and could in a few cases affect employment
options.
If you can
not sell your house for enough money to cover the balance of your
loan, and are not able to pay the difference, another option is a
Short Sale. In a short sale, the lender agrees to accept less than
the full amount owed on the loan. This sometimes necessitates difficult
negotiations with the lender. There can be additional complications
if there is a second mortgage on the property. Lenders will normally
require that the house be listed with a real estate agent, and the
house can not be sold to a family member, nor rented back to the seller.
Though sometimes difficult, many lenders are finally beginning to
recognize that they will lose more money in a foreclosure than they
will in a short sale.
A short sale
WILL damage your credit, but the recovery period is much shorter than
it is after a foreclosure. The lender may forgive the unpaid balance
of the loan, but that is not guaranteed. It may be necessary to negotiate
with the lender to avoid having a judgment placed against you, or
being forced to sign a promissory note for the unpaid amount.
If you are
doing a short sale, you must stay cooperative. If you've sent information
five times and they ask you to send it again, then send it right away.
If you get defiant, you will lose, and you will be hurting yourself,
not the lender. It's also important that you keep records. You will
probably need bank statements (not the online printout), pay stubs,
tax returns, profit and loss statements for any self-employment, proof
of any other income and other documents.
If the short
sale is ultimately unsuccessful, especially if you are unable to find
a buyer, you may request a Deed In-Lieu-Of Foreclosure, where you
agree to return the title to the lender in exchange for the forgiveness
of the remaining debt. You may be tempted, out of frustration, to
let the property go into foreclosure. This should only be done as
a last resort, especially since you have a lot of options before getting
to this point.
Lenders have
also taken steps to make strategic defaults more difficult, where
the homeowners deliberately stop making mortgage payments, even when
they can afford them. This can have greater credit implications down
the road, because the borrower has just made a decision not to honor
their commitments. Lenders can also take a borrower back to court
and go after other assets to get the rest of the money owed (This
is also why it's a bad idea to trash your house before the foreclosure
sale).
Tax
Implications
If your lender
at any point forgives part of your debt, your troubles are not necessarily
over. The Internal Revenue Service regards forgiven debt as income.
In other words, if you borrowed $300,000, but only paid back $200,000,
that's $100,000 in income, regardless of the value of the house. It
doesn't matter that you don't have the house, or the money.
By 2007,
the rising numbers of foreclosures and short sales, meant that more
and more borrowers were being caught in this situation. To deal with
this, Congress passed the Mortgage Forgiveness Debt Relief Act in
December, 2007. The law exempted a homeowner from paying tax on this
forgiven debt from 2007 to 2009 for their principal residence. The
following October Congress extended the exemption through the end
of 2012. The exemption only applies to a primary residence, not investment
properties. To qualify for this tax benefit, you must fill out a form
982. The form and requirements can be found at www.IRS.gov.
©Copyright
2011 Douglas R. Barry.
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Distressed Homeowners Should Know
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