What to Do If You Can't Afford Your Mortgage

It was not so long ago that the term “short sale” was about as familiar to the average American as a novel written in hieroglyphics, while “foreclosure” was a thing that happened infrequently and only to other, irresponsible people. Today, these terms are sadly mainstream.

Whether due to an adjustable-rate mortgage which has reset, resulting in higher loan payments, or because of job losses or pay cuts making once affordable payments now unaffordable, too many homeowners are finding themselves facing difficult decisions. If you find yourself in one of these situations, it is important to know that you do have options.

Short Sale

A short sale is a sale of your home in which the proceeds will be insufficient to cover your obligations including costs of sale, any unpaid taxes or other liens, and (most importantly) your outstanding mortgage balance. Short sales require lender approval, since the lender will be agreeing to accept less than what is owed as payment in full.

Short sales are a tricky business, and the process can be painfully long. Lenders are not typically known for their catlike quickness in responding to, well, anything, under even the best of circumstances. Today, these same lenders are inundated with a deluge of delinquent loans and short sale requests. If you do proceed with a short sale, know that the process is not without risk. After an acceptable offer is presented to the bank, you may find yourself waiting for 90 or 120 days or more for an answer and with no guarantee that the lender will ultimately accept a short payoff.

It is important to ensure that you are working with an agent who has experience in handling short sale transactions. Your agent should advise you to consult your attorney or accountant as a part of the process so that you are fully informed as to any potential tax consequences. Generally today, forgiven debt is not taxable, but the laws change regularly.

Most importantly, if your agent doesn’t discuss alternatives to a short sale, run, don’t walk, for the nearest exit. You do have options.

Loan Modification

Short sales, like foreclosures, will negatively impact your credit. And let’s face it, keeping your home is the real goal. Many lenders will consider modifying your current loan depending on your circumstances. This modification may include a reduced interest rate, a reduced principal balance, or both. Often, simply renegotiating your current loan is a viable option. Be aware, however, that like the short sale process, the loan modification process can be a long and challenging one. To attempt this on your own is risky, and it is wise to get the counsel and assistance of professionals. But...

Beware of Scams

Unfortunately, there are many people attempting to capitalize in our current, challenged housing market by offering homeowners with troubled loans a magic pill. There are many people who can help you sort through the issues and find the best solution given your circumstances, but there are others who may not have the skills or motivation to act in your best interests.

Over the past year, there has been a proliferation of businesses targeting homeowners who are delinquent in their mortgage payments, offering to assist them in obtaining a modified loan for an upfront fee (since once a home goes into default, it becomes a matter of public record). Some are legitimate enterprises and others are scams. Before you relinquish your checkbook, know there are non-profit agencies which will assist you without charging a fee, such as the Federal Housing Administration and Hope Alliance.

Do Your Homework

The most important first step to take if you find yourself treading water or underwater with a loan you can no longer afford is to become informed. Talk to a variety of professionals and agencies which may be in a position to help you sort through the options. And remember that there are options before you concede your home.