When homeowner's fall behind in their mortgage payments or foresee a future problem looming, the decision has to be made whether to sell the home or try a ‘work-out'. Failing that means the possibility for a costly, messy, and humiliating foreclosure becomes more likely.
There are a couple of things to consider when facing this or similar situations. First if, as the homeowner, you absolutely want to keep the house you'll have to be able to prove that you can afford the payments. That means doing a budget, a cash flow statement, and providing supporting documents like Tax returns and pay stubs. Also, getting in touch with your mortgage servicer should be a top priority. Getting your servicer on board early helps to ensure their cooperation with whatever options you choose to take. They won't be too helpful if you wait until the last minute.
When making the decision to sell your home; when you owe more on your mortgage than the house is worth, your lender will become involved in what is known as a "short sale". Basically, a short sale means the lender agrees to take less than what they are owed in order to sell the property. There are some requirements that must be met before a lender will agree to a short sale, and their Loss Mitigation Department will take a look at:
- How far behind on payments is the borrower?
- Can the borrower tap any other assets to cover any deficiencies?
- What caused the deficiency? Was there a hardship?
- and more...
If a short sale is agreed to by the lender, they will generally not seek any further payment from the borrower, but that doesn't mean the borrower is home free. A lender will usually submit an IRS 1099 in the amount of the difference between the sale price and the amount owed to the lender. The Internal Revenue Service considers this amount "forgiven" as earned income to the borrower, and therefore will tax that amount.
When a short sale isn't possible or undesirable; its time to begin negotiating for a loan "work out" or modification. A modification can be in the form of a rate adjustment, or change in the terms of the loan that make the house more affordable to the borrower. Or at least, make it easier to keep up on the payments. The types of modifications that a lender can do are extensive and to make a list, would make for a very boring read. Suffice it to say, that if a modification is necessary, getting in touch with the lender early and staying in touch, is the only way to encourage them to cooperate. Remember that if you don't ask... You won't receive! So if you need a lower interest rate, ask for it. If you have fallen behind on your payments because of an illness but are able to pay on time again, ask for your past due amounts be added to the end of your loan. If refinancing is a better option, ask for favorable ‘refi' terms. If you need help, ask for it! Above all, don't panic, try not to stress yourself out, and begin looking for better options. Your real estate agent, loan officer, mortgage servicer, and others are professionals who can help, all you have to do is ask.
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