If your mortgage payments are delinquent and you have not contacted your bank, you should do so immediately. I have worked with several sellers that have the idea they can't afford the house, nor the real estate commission, to sell the house with a Realtor, so they would rather just walk away from their home and abandon the house. What homeowners do not realize, is the mortgage that you obtained to finance that house remains attached to you even if the bank that takes over the home sells the property. The contract was between you and the bank and most likely was not transferrable. So if you walk away from the home, you not only look at a future judgment being placed against you (if not tended to can end up costing you far more than the loan did itself) but also a lien on any other property of asset value. It also reduces your chances in obtaining another loan and can cause damage to your credit rating.
As a homeowner in distress, contact your lender. Tell them your financial situation has changed. If you have made your payments on time and are in good standing and still have your job, you may qualify for a loan modification so you can stay in the home. If you have missed payments or the bank does not find you to qualify for a loan modification you may have the option of selling your home in a short sale process, which really isn't short at all.
A short sale involves a lender or investor agreeing to collect less than the balance owed on a mortgage debt out of the proceeds of a negotiated sale of the property. Often, a short sale is the last alternative to foreclosure available to distressed homeowners and banks. If your bank agrees to accepting a short sale, you need to hire a realtor familiar with the short sale process. Then you must wait for a buyer who has financing to close the deal and will make an acceptable offer to the bank. If your property has a second mortgage or home-equity credit line, you also need to negotiate how much that lender will receive from the sale proceeds. Sometimes that second mortgage lien may be worthless, but that bank has a legal power to block the short sale by refusing to sign on the deal. And we have come to find that banks, mortgage providers and bond investors are conflicting in their requirements.
But Homeowners may be in for some relief. Believe it or not the first choice for lenders was to keep borrowers in their homes by offering loan modifications as an alternative to foreclosure. According to the Office of the Comptroller of the Currency on September 30, 2009, more than half of those modifications of delinquent mortgages re-defaulted within a year.
Because of this, Obama's administration has now implemented a new standardized short sale plan that is scheduled to roll out in April 2010 which will require lenders to consider borrowers for a short sale on their primary residence 30 days after missing two consecutive payments on a modified loan or after a borrower requests a short sale.
With this plan, the Department of Treasury's program will pay up to $1,500 for a homeowner to relocate, $1,000 to loan servicing companies that accept a sale and a maximum of $1,000 to help settle a second mortgage or subordinate lien. And the lender must agree to release the borrower from all liability for repayment of the mortgage.
Now if I was a Homeowner In Distress, I would think twice about abandoning my home and do whatever it took to communicate with my lender. Whether it be a loan modification or a short sale, in the end I would have saved my credit and my sanity.
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