Since the real estate market turned for the worst, a lot of Borrowers have found themselves in a position where they owe more than their home is worth. As long as you don't need to sell your home and as long as you can afford the payments, your best bet it to sit tight and do nothing. Eventually the market will rise and your home value will go up. Buy what if you HAVE to sell? What if you are faced with a job relocation, divorce, illness, or financial hardship? What happens if you can no longer make your mortgage payments? Is foreclosure your only option?

Many Borrowers are approaching their mortgage holder and requesting that they accept a short-pay. This is commonly called a short sale.

What is a Short Sale?

A short sale occurs when a lender is willing to accept less than the full mortgage pay off. They short the loan. It is when the lender absorbs the loss and allows the Borrower's debt to be forgiven.

A property is a candidate for a short sale when all liens, plus costs of sale, exceed the market value. Liens include mortgage liens, mechanics liens, tax liens, unpaid judgments, unpaid HOA fees.

A short sale is form of pre-foreclosure sale in which the mortgagee agrees to accept less than the loan amount to avoid foreclosure. The good news is that the lender pays the closing costs, commissions, title fees, and repair costs. The seller gets the home sold, the loan satisfied, and avoids foreclosure.

What are the Borrower's Options When They Cannot Pay Their Mortgage?

If you find yourself in this unfortunate circumstance you have twelve options.

1. Contact your lender: Homeowners facing financial difficulties often make the mistake of avoiding their lender, which is exactly the wrong thing to do. If you are unable to make your mortgage payments, contact your lender as soon as possible and explain your situation. Find out your options from your lender.

2. Contact family members and friends: Ask for help from your family and friends. Don't let pride stand in the way. If you were in a position to assist a family member or friend who was facing a similar situation, how would you feel if they didn't ask you for help?

3. Reinstate the mortgage: If you expect your financial situation to improve you may ask the lender to work with you through this temporary set back. If you can come up with enough cash to bring mortgage payments up to date, the lender will probably agree to hold off on foreclosure proceedings. This is commonly called a "work out agreement."

4. Negotiate a forbearance: Forbearance allows payments to stop temporarily or be reduced for a specific length of time. The lender may grant forbearance of principal, interest or both. The borrower will be responsible for repayment of accrued interest charges. Sometimes the borrower can make interest-only payments, or the interest will be added on to the principal. The key is to contact your lender right away. Even if you think it is too late, it's never too late to ask!

5. Refinance the loan and consolidate your debt: With a good credit history, you may be able to consolidate your debt with a loan that requires a total monthly payment of less than you're paying on all your other loans put together. Be careful with this approach because you may only be making matters worse. Lenders will not accept a short sale when the loan is less than ony year old.

6. Sell your home: If you have equity in your home, consider selling the home and finding more affordable accommodations. Selling the home is what 90 percent of those who are facing financial hardship really need to do, but unless you act quickly, you may run out of time.

7. Negotiate a short sale: Lenders typically want to avoid foreclosing, because of the costs associated with it. Most lenders are open to negotiating a short-pay on the loan. This isn't something you should attempt alone. Talk with a knowledgeable Bradenton Realtor.

8. Consider a sale and leaseback: This is when you sell the home and then rent is back from the new owner. A real estate investor might be interested in such a creative solution. It can ba a win/win. The investor gets a nice property with a tenant already in place; and the seller reduces their payments. Be careful of scams from tricky investors that could make matters worse.

9. Give a deed in lieu of foreclosure: You may be able to offer the lender the deed in exchange for them not foreclosing on you. You lose the house and your equity, but retain your credit rating. In a market with declining values it is unlikely that the lender will accept a deed in lieu of foreclosure. It may have a negative effect on your credit.

10. File for bankruptcy: Bankruptcy is rarely the best choice. In most cases, it simply buys you some time, but it does not stop foreclosure. Bankruptcy is disastrous to your credit and is costly.

11. Foreclosure: This is, by far, the worst option. With foreclosure you lose your home, lose your credit rating, and any equity you may have built up. You will probably not be able to buy another home for years to come and your credit will be ruined for years. You may also face a deficiency judgment. This is when you still owe what the lender lost.

12. Do nothing: Many borrowers do nothing and end up in foreclosure or bankruptcy. Most people stay in denial far too long and lose the opportunity to salvage their financial situation. You should know that doing nothing is not an option. Don't wait until it is too late to be helped.

Is a Short Sale My Best Option?

If your financial situation is unlikely to improve in six to twelve months, a short sale may be your best option. The worse case scenario is that the lender will give you a 1099 for the amount of debt forgiven. You may owe income tax on this amount. You will want to talk to your accountant to find out if you qualify for "insolvency" which will eliminate any tax due. Insolvency is when your liabilities (what you owe) are larger than your assets (what you own).

None of the above should be considered legal or tax advice. Always, consult appropriate professionals.

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