A house purchase is a long-term financial commitment. If you are unable to keep that commitment, you can end up facing foreclosure. This is not a good position to be in, but there are several ways to deal with the situation.
If you have missed a few months of payments, you probably aren't in foreclosure yet. Start paying now and contact your lender to arrange a schedule for making up all your missed payments. Do whatever is necessary to get money. Take on a second job, cut back on discretionary spending, and even ask your relatives for help if needed.
The advantages of starting to pay are that you can probably avoid foreclosure, which means you'll keep your house. The drawbacks are that it may be painful to rearrange your finances to make it happen, and starting to pay now won't erase the notations on your credit history that you failed to pay your mortgage on time.
Deed in Lieu of Foreclosure
This simply means that your lender will cancel foreclosure proceedings in exchange for the deed to the property. You might still be in a position of paying the difference between your loan and what the property brings to the lender when it is sold.
The advantages of this method are that you will definitely avoid foreclosure and you might not owe any further money. This will occur if the bank chooses to forgive any loan balance that exceeds the sale price of the house. Also, it impacts your credit score far less than a foreclosure would. Strong disadvantages exist, however. Depending on your circumstances, the IRS might regard that forgiven balance as income, and you will be responsible for paying taxes on it if the home is not your primary residence. Since it represents money you did not in fact receive, you may not have any funds to pay those taxes. Consult your accountant.
In a short sale, the owner sells the property for less than the value of the outstanding mortgage. The balance of the loan is typically forgiven, which can create a taxable event if the property is not a primary residence.
The pros of a short sale are that it's less damaging to your credit than a foreclosure, and that banks are increasingly more willing to do short sales than the "in lieu of" method described above. The cons include the fact that you can't do a short sale without the permission of your lender; the time needed to secure that may cause the buyer to walk away. Some banks are more willing than others to allow a short sale.
In a loan modification, the lender agrees to renegotiate the mortgage contract. The total amount of the loan, the interest rate, and the payment schedule may change in order to create a loan that is more realistic for the borrower to pay back. The advantages of this are that you may be able to keep your home, and in a way that minimally damages your credit. The disadvantages are challenging fees and paperwork, dealing with a reluctant bank, and some notations on your credit history.
This is the worst option of all. Foreclosure puts a black mark on your credit record that lasts for years and affects not just borrowing opportunities, but employment and rental prospects as well. You should strive to avoid foreclosure at all costs by choosing one of the alternatives described above.
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Jolenta Averill, Principal
Lake & City Homes Realty