Many of our clients are confronted with trying to sell a home out of necessity, or just because they do not like it any more. Because of the so-called mortgage crisis and other problems in our economy, it is no secret that the value of homes in many parts of the United States has declined; some areas more drastically than others. With that decline, many people are now finding they owe more on the home than they can sell it for. Some people even have vacation homes or homes they have left behind in a career move that they cannot afford payments on. Here are some steps to take if you find yourself in this situation.
If you are behind on your mortgage, lenders are generally willing to help you with one of three options. These include temporarily reducing or waiving payments altogether, setting up a short-term repayment plan, and adding the unpaid balance to the principle of your current loan which increases your payments slightly. The lender does not want to foreclose on any homes, but especially so in today’s markets where foreclosures are at an all-time high.
The “loss mitigation” department is who you need to talk to if you need to work out a plan. Be sure you can follow through on the plan you develop, or the lender will not have much sympathy for you the second time around. Even if you cannot make the payments, corresponding with your lender is still the right thing to do. Tell them what is going on and what they can expect from you in the future.
If selling the home is the right thing to do, make sure to put it on the market immediately. If the market is down and it is the right time in your life to sell, then you need to sell regardless of the market. A quick sale is a good option if you have equity in your home. Make sure to meet with a competent real estate agent to determine how to price your home and what your sale expenses will include.
If your house has been on the market for some time but has not received any offers over the balance of what you owe the lender, you may opt to do a deed in lieu of foreclosure. Generally you can only have a first mortgage on the home, and you have to make an effort to sell your home first.
By doing a deed in lieu of foreclosure, you are offering the lender to accept what the home will bring along with the deed to your home, leaving you free of the mortgage. For instance, if you owe $300,000, but only receive offers for $290,000, the lender may agree to take the offer along with the deed, and write off the $10,000 balance, releasing you from the home. The lender avoids the time and cost of foreclosure in this instance.
Another option is to negotiate a short sale. A short sale is a settlement with your lender to accept less than what is owed on the property. The lender does have some responsibility for lending you money that they should not have given you. Of course, the ultimate responsibility lies on you for having signed up for the ride.
Essentially, you sell the home for what it will bring and the lender agrees not to go after you for the deficit. A settlement will most likely damage your credit score, but getting released from a home that you cannot afford is the best course of action. You may be liable for taxes on the amount that was settled, but I would rather pay taxes on $50,000 than an entire $50,000 debt.
Foreclosure is your last option. In many states the lender can go after you for the unpaid deficit, and a foreclosure will affect your credit for years. Do what you must to avoid a foreclosure, but face reality wherever you are. Do what is right for your family when it comes to housing and financial decisions.
To help avoid any of these problems in the future, put down at least 20% (or more) as down payment on a home, and do not buy if you need to take out more than a 15 or 20-year fixed rate mortgage. Your payments in this case should not exceed 25% of your household take-home pay.
Justin Lukasavige is a Personal & Business Coach and owner of Lukas Coaching. Visit www.lukascoaching.com/resources.htm for a ton of free tools to help you improve your health, finances, business, career & life!