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With Federal student loan and mortgage loan forbearance about to end, you may be considering other options to leave a home mortgage behind. The worst thing you can do is ignore your house payment and hope for the best. The smart thing to do is look at your budget and make decisions based on what you can realistically afford.
Two options that many consider are foreclosure and short sales. Both of these options get you out of your house and out of your mortgage payment. There are pros and cons to each option though, so you’ll want to be aware of what you are signing up for either way.
Foreclosure Issues
With a foreclosure, you quit paying and eventually receiving a notice of foreclosure from your lender. In TX, this can be a relatively quick process, as banks often have the power of sale clause in the home deed of trust. Your home could be on the foreclosure auction in as little as a month if you choose not to pay your mortgage.
There are two major issues to consider when going through a foreclosure.
Credit Score Crash
Your credit score is going to crash by 100 to 400 points depending on how many payments you missed before the foreclosure even happened. Those missed payments really bring you down even before you have to leave. This means that you will have trouble obtaining any type of loan for about 7 years. No more car loans or home mortgages without some type of secured loan with an exorbitant interest rate.
If you have credit card debt, it will become harder to discharge because you will not qualify easily for debt relief programs with a terrible credit score. Even getting a job or signing up for utilities can be a real problem. Utility companies can charge hundreds in security deposits and apartment complexes you apply to can do the same, as well as reject you outright because of your bad credit history and score.
Deficiency Judgment:
The other issue with foreclosure is that because you are not paying your home loan, the bank has a legal right to come after you for the money you still owe them. This can be a long legal battle with a possible judgment against you in the tens of thousands of dollars. This is called a deficiency judgment.
If you can’t prove that your house is worth more than you have already paid for it, you could easily be subjected to a judgment that has to be paid monthly in addition to whatever rent you may pay once you are asked to leave your home. This could really add up to more than you are paying now!
For example, you buy a house for $200,000 and your monthly payment is $1300. You have paid off $150,000 of your loan so far. You then stop paying your mortgage or deed of trust any longer and enter foreclosure. At this point, the bank sells your home at auction for $175,000.
The bank then files a suit against you for the remaining $25,000 of your loan that they were not paid. The court decides against you and rules you must pay $750 per month toward your court judgment until it is a zero balance. This is in addition to any court fees or attorney fees you may incur to fight the deficiency judgment.
If you get an apartment in the Houston area for $1000 per month and you owe $750 per month toward your deficiency judgment, you are now paying $1750 per month whereas before foreclosure, you only paid $1300.
Short Sale Qualifications
With a short sale, you are working with your bank. You let them know that you can’t pay your rent and that you have a qualifying event that makes your financial situation worse.
These could include:
- The home’s market value has dropped: If you can prove to the bank that the house is worth much less than what you have already paid, it is possible that they would approve a short sale.
- If your mortgage is in a non-payment status and you cannot pay, the bank may consider a short sale.
- If you have a hardship of some kind and can explain why you will be unable to make payments in the future (such as unemployment, divorce, health issues, or bankruptcy, the bank may consider a short sale.
- If you have no money or assets to pay with and can prove it.
Short Sale Issues
With a short sale, your credit will remain a bit more stable if you can continue making payments until the bank agrees to sell the home. This process is a long journey with the bank and a realtor. The realtor will work with your bank to get an approved offer on your home. Once the bank approves an offer, the sale can move forward. The entire process could take up to a year though and there are still possible problems with choosing this route.
Issues include:
- The short sale process can run on for a year or more as the bank deliberates each offer
- IF you miss any payments while you are waiting, you can STILL ruin your credit score
- Once the bank accepts an offer, the bank can STILL take you to court for a deficiency judgment. This is a situation where you will want to be sure that the short sale agreement with your lender says clearly that you will not be held further accountable for any of the loan once an approved sale has gone through.
The biggest positive with a short sale is that your credit will only drop a bit. However, your loan may be listed as “Paid in Full for Less Than Agreed”. Future mortgage lenders may take this very seriously and it may still be difficult to get any kind of credit for 2-5 years.
Tax Consequences
One more thing to consider with both a short sale or a foreclosure is that if any amount of loan that you owe is forgiven by the bank (because they do not seek a deficiency judgment), you can still be taxed on that amount by the Federal government as if it were income. This is not an insignificant amount if your income bracket is already high.
Seek Counsel
If you are struggling to make sense of your mortgage and financial situation, seek out a knowledgeable real estate attorney to find out your options. Often, there are other ways to escape the pain and embarrassment of not being able to pay your mortgage. A wise attorney will have answers that get you back on the road to financial health and let you see all of your options clearly.