In today’s difficult economic environment, what happens when you have a home worth less than you owe, monthly payments more than you can afford and a lender who will not work with you?  You may have to “walk away” by giving the keys to the bank, doing a short sale or just letting the lender foreclose.  Clearly working with the lender is the best option if you want to keep the house but if that fails and walking away is your option, you probably won’t be hurt as bad as you might first think.   Most likely your lender will not sue you, your credit will be hurt but not forever, and the tax consequence may be not bad.

Lender

When you stop making payments on your mortgage you can count on your lender contacting you and attempting to collect.  They may even threaten you with a lawsuit.  Turns out this may be a good time to get them to actually negotiate and modify your loan.  When you called, they refused but often when they call, loan modifications seem more interesting.   If this is not what you want or they really are unwilling, there is a school of thought which says lenders know it is too expensive to sue a borrower who is already having financial problems.  It is the old, “You can’t squeeze blood…”  In California a mortgage lender who forecloses is prohibited from pursuing borrowers for the balance.  Please note this may not be the case for your home equity loan.

Credit

A foreclosure, short sale or deed in lieu of foreclosure will hurt your credit score and report.  The negative impact may last as long as seven years but the amount of damage will really depend on how much trouble you got into with other creditors.

Ideally you want to only have the mortgage credit issue on your record.  As more people are placed in the same position, the ones who maintain their other credit accounts will fewer problems getting credit in the future.  You have a story to tell and it will be understandable and I predict we may actually see an adjustment to how credit scores are determined to account for the impact the housing problem.  To the extent that mortgage related credit problems do not predict future behavior as it may have 5-years ago, we can expect credit scores to be changed to reflect that.

I have just heard of at least one lender who is setting up a program for people who lost a home through a short sale or foreclosure but want to buy a new one. 

Taxes

How will losing your home impact your taxes?  Never forget you have to pay taxes!  In the past, debt forgiveness was treated as income.  Recent changes in the law have changed this on a federal level.  Through 2012 there is no tax obligation on most primary residence loan forgiveness, loans reduced through restructure and forgiven during foreclosure.  California has passed laws to be in line with the federal program.  You should always check with a CPA or other tax professional to confirm and understand the tax consequences of you actions.

Times are not easy, many of us are struggling with the current economy and there will be more foreclosures, short sales and handing the keys back to the lender.  If “walking away” is something you are considering the consequences may not be as bad as you might have first imagined.  If I can be of any assistance in helping you avoid a foreclosure give me a call at 916 276-6883 or send me an email to juliej@jalone.com.