Debthelper: 4 Options When You Can't Pay Mortgage

    The housing market has crashed, and left many homeowners struggling to make their mortgage payments. Many homeowners qualified for overpriced homes by unscrupulous lender practices or by embellishing their incomes. Now they're wondering how they are going to make a mortgage payment that has doubled. If you're in this situation, here are some tips that you could take to save your home from foreclosure.

1. Contact your lender to find out what your options are before you fall behind on the payments.
If your lender isn’t offering any solutions, you may have to make some difficult decisions. Many people think if they can't make their payments, they will just let the house go to foreclosure. They think that it can ruin their credit, but then it is over. Not many people realize if you let the house go into foreclosure, you will be responsible for the balance left over after the home is auctioned. This can be an extremely large amount of money.

2. Consider a quick sale.
This would allow you to avoid foreclosure even if you will be losing your home. They can be far less costly than a foreclosure. In a quick sale, the owner agrees to sell the property quickly at a reduced price and the lender agrees to stall foreclosure proceedings. However, a quick sale is only an option when you have equity in the property. A quick sale will not affect your credit, and when it is a possibility it works out well for you, the lender and the buyer. If you don’t have any equity, it is a must to call your lender to explore other options that may be available.

3. Short sales are the preferred option by homeowners.
A short sale is when you are able to sell the property for less than what is owed on your mortgage. It allows you to sell your home even if your home value has dropped, and there is no equity. This is also good for people that had loans with negative amortization. The home must sell for no less than 80 percent of the home’s appraised property value. With a short sale,  the lender either writes off the deficiency balance, (and it must be claimed as income on your taxes) or the homeowner must set up a repayment plan or take out a different loan to pay it off.  The deficiency balance on a short sale is usually significantly less than on a foreclosure.  Although, less damaging than a foreclosure, a short sale will also be reflected on your credit report. It is unfortunate, but short sales are becoming harder to do in the current market. If you are interested in doing a short sale, it is best to find a real estate agent who specializes in short sales.

4. Another popular option is a Deed in Lieu of Foreclosure.
In this case, you simply deed the property back to the lender without the expense of foreclosure. The advantage to this option is that you will not have a deficiency balance to pay back or to claim on your taxes. You are only eligible to do a Deed in Lieu of Foreclosure if there are no other liens on the property, and the home must be your primary residence. A Deed in Lieu of Foreclosure will also be reported to the credit bureaus. However, a Deed in Lieu of Foreclosure is less detrimental to your credit than a foreclosure.

What if your lender won’t agree to any of these options? Another option would be to seek legal advice from a bankruptcy attorney to see what recourse you have depending on your personal situation. Many attorneys offer free consultations. Keep in mind if you actually hire an attorney it is not cheap, but it can protect you from legal action your lender may take against you. It generally costs about $250 to $300 an hour when you hire a bankruptcy attorney. A qualified attorney can also offer options for paying him or her. If you are unemployed or meet federal poverty level guidelines, you may be able to qualify for free or low cost legal aid services. The best way to look at the situation is to see it as a fresh start, and do as little damage to your wallet as possible.  


Jennifer Lane is a certified credit counselor and is taking questions I can answer in upcoming articles. Please feel free to e-mail your questions to me at jlane@debthelper.com.