My wife and I have been trying to sell our home for nearly a year. We have had little or no traffic no matter how much I lower the price. We CAN afford the payments, it's just that the home has become way too small for our family size.
I have been pre-approved for another loan on a much larger house with the payments being almost identical. This would be a new build and the loan would be in place before I defaulted on my current mortgage. I was approved to carry both mortgages.
What are the consequences besides taking a credit hit if I default? My wife and I are both over 750 credit rating. Are there any other options for my situation?
If you default, in addition to the negative impact to your credit score, you may be responsible for a deficiency. A deficiency is the difference between what a lender is owed on a mortgage and what it receives. I will explain this in more detail later.
If you want to keep your credit intact, you may consider selling the property at loss and covering any short fall out of pocket. For example, if you find a buyer for your home at $400,000 and your closing costs including the money you owe the bank are $425,000, then you can come up with the $25,000 short fall at closing. Another alternative is you can look for a tenant for current property to cover the monthly carrying costs when you decide to move. You may have to cover the difference from the rental amount and the carrying expenses. Of course, the key questions are: how long are you willing to carry the house and when will you be able to sell the house?.
If you decided to default, you have various options.
You can utilize a short sale, deed-in-lieu, loan modification or let the property go to foreclosure sale. All of these options will negatively impact your credit and will expose you to a possible deficiency.
A short sale occurs when a lender let’s you sell your property for an amount less than what is owed on the mortgage. Essentially your lender may be willing to accept less than the full amount due on a mortgage. If you owe the lender $400,000 then the lender may agree to let you sell the property for $350,000. Keep in mind that the $50,000 difference will become a deficiency. A deficiency balance can be forgiven or it can become a judgment. If the deficiency is forgiven then there may be a tax liability. The lender may refuse to forgive the deficiency and instead seek a deficiency judgment. This is a legal judgment obtain by a lender after filing the proper legal paperwork in court. If the lender successfully obtain a deficiency judgment then the lender has the right to seize the cash in your bank accounts, garnish wages, or place a lien on personal property, business assets or real estate.
A deed-in-lieu is when you enter into a written agreement to give the property back to the bank. The key is to negotiate a full settlement of your total outstanding mortgage debt including fees and penalties in exchange for the deed to your property.
You may be able to modify the loan for a lower payment or a reduction in the principle balance.
If you let the property go to foreclosure sale then the lender will sell your property at an auction. If the lender takes the property back then you will not have any deficiency. If the lender sells the property at auction for less than what is owed then there will be a deficiency.
You may not owe a deficiency in certain circumstances. The Federal Mortgage Forgiveness Debt Relief Act and Debt Cancellation provides relief to homeowners from paying taxes on any forgiven debt. Also certain states have anti-deficiency statues. This means that state law prevents a lender from pursing a borrower for any debt deficiency. A state that prevents a lender from pursing a borrower for any debt deficiency is called a non-recourse state.
Please read the following articles and posts. This will help you significantly.
What You Need To Know About Debt Forgiveness, Obligations, and Deficiency.
Recourse v. Non-Recourse State.
Bottom line. Your primary risk is any deficiency.
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