What to do when you owe more than your home is worth

First off, my usual disclaimer…I am not an attorney and this is not intended to be legal advice or a legal opinion. 

Dennis Norman

Now that we have that out of the way lets talk about options that may be available to you if you are one of the 20% of homeowners that a recent study says owes more on their mortgage than their homes are worth.

If you do find yourself in this situation fortunately today there are some options available worth considering:

• See if you qualify for the Making Home Affordable Loan Modification Plan.  This program is for those homeowners that are struggling to make their payments, or may have even missed a payment or two, but could make their payments if the amount was reduced.  To complete a short questionnaire and find out if you may be eligible for this click here.
• If you have an FHA loan you may wish to contact a HUD approved counseling agency to explore what options may be available to you.
• For an extensive list of resources that are available please see my post “Help for homeowners facing foreclosure“.

Another option that may be available to you, particularly if you cannot afford to stay in your home even if your loan is modified, is a “short-sale”.  A short-sale is something that was relatively unheard of a few years ago but is quite common today and refers to those sales where the sale price of the home is not sufficient to repay all the debt owed on the home and the lender chooses to accept a lessor amount to release their lien on the home.

Short-sales have proven to be a win-win situation for all parties involved on many occasions.  The positives of a short-sale include:

• Seller is able to voluntarily sell their home rather than potentially face a forced sale such as foreclosure. 
• Seller gets to continue to live in the home while the sale process proceeds.
• Seller avoids having a foreclosure tarnishing their credit and is released from liability for the short-fall on the loan in some cases (be sure to look into this)
• Lender avoids the expense time of foreclosing on the home.  Also benefits from the owner continuing to live in the home, keep utilities on, mow the lawn etc.  
• Assuming the lender approves the short-sale then the lender has seen the short-sale as a good business decision and feels they are coming out of the deal as good or better than they would if they foreclosed.
• The buyer of the home gets an opportunity to buy the home at a realistic price based upon current market value.

 Some of the negatives of this type of sale include:

• Seller is  not automatically released from liability for the short-fall on the loan and if not could sell their home and still be facing liability for the short-fall.  In addition, there is no guarantee that there will not be a negative impact on your credit.  There are a lot of differing opinions about the effect of a short-sale on credit ranging from no effect to the same as a foreclosure.  In either event you may well decide you are still better off with a short-sale than a foreclosure.
• It takes time.  Selling a home the conventional method in this market takes time but short-sales involve another element; obtaining the lenders approval of the price.  Since in mot cases the lender is going to be asked to take a big hit on your loan needless to say they don’t just agree to that without doing some due-diligence, which takes time.  The lender will want to obtain information to substantiate that the sale price proposed is the current value of the home.  In addition the lender will want you to submit information showing the state of your financial affairs so they can determine if you have the ability to pay the shortfall, or some of it.  
• There could be some potential tax issues if you are forgiven of some of your debt. The Mortgage Forgiveness Debt Relief Act and Debt Cancellation Actof 2007 provides relief from this for homeowners that meet the qualifications.  Consult a CPA or tax attorney to confirm you meet the requirements.

 If you feel your circumstances warrant trying to do a short sale I would suggest to act upon it as soon as possible and don’t wait until you are behind on payments or your back is against the wall.  As I said above, they take time and the more time you have the more likely you will be successful.  

The next step would be to find a real estate agent to list your home with.  I would suggest you spend some time on this and do your research to find an agent that has experience and knowledge of the short-sale process.  The agent representing you will play a large role in the process and can make or break the deal so make sure you choose smart.  This is definitely one circumstance where I would not select an agent because they are a friend or relative.  I would look for a full-time professional REALTOR(R) with proven experience as a listing agent on short-sales.  

I would also suggest visiting with your tax preparer, CPA or tax attorney to explore any tax consequences you may have as a result of a short sale.  In addition I would also highly recommend getting an attorney involved when it comes time to negotiate with the lender.  An attorney can help assure you are going to be released from liability or if not at least fully explain to you what you are getting yourself into.  I realize your financial situation may not allow for this in which case I would suggest you contact Legal Services Corporation, a not-for-profit organization established and funded by Congress that provides free legal representation to low-income families. If you go to their website you can use the drop down box in the upper right corner to enter your state and county to locate the nearest office to you.

 FINAL DISCLAIMER: I’M NOT AN ATTORNEY AND THIS IS NOT A LEGAL OPINION, LEGAL ADVICE, NOR A LEGAL INTERPRETATION OF ANY RULES OR COURT CASES.  THIS INFORMATION IS BEING REPORTED AS “NEWS” AND FOR INFORMATIONAL PURPSOSES ONLY.  IF ANYTHING IN THIS ARTICLE HAS INFLUENCED YOU IN ANY WAY CONSULT YOUR ATTORNEY BEFORE DOING ANYTHING.

Related posts:

1. Thinking of “walking away” from your mortgage?
2. Fannie Mae Issues Guidelines For HAFA Short-Sales and Deed-in-Lieu
3. Will you owe taxes on a short-sale or foreclosure?
4. Help for homeowners facing foreclosure or are underwater
5. Home Affordable Foreclosure Alternatives Program (HAFA) Launched