When faced with the sinking feeling you can no longer make your mortgage payments your next question is likely: What are my options?
Foreclosure is a long and complicated process in which the bank takes your home back because of default. In Colorado the mortgage company files a "Notice of Election and Demand" in as little as 45 days after you have missed your payment. This starts the foreclosure process and in as little as 3-4 months the bank takes back your home. The foreclosure process should be avoided when ever possible. The long lasting effects of a foreclosure are numerous. It will typically drop your credit score 200 to 300 points for starters. Since you not only sign a mortgage (or deed of trust) when you buy a house but also a promissory note, the mortgage company can come after you for the deficiency. The deficiency may include, principal, interest, penalties, attorney's fees back taxes etc... You may also have to pay taxes on the deficient amount. There are too many options available today to just give up and go into foreclosure without trying to work out a short sale first.
What is a short sale?
A short sale is where the mortgage company will accept less money when you sell your house, than you owe on your mortgage. In example: Let's say a person owes $200,000 on a home that would only sell in today's market for $175,000. The mortgage company may accept the $175,000 sales price and pay realtor's fees and closings costs, so they don't have to foreclose on the home. Foreclosure is expensive for a mortgage company and they would rather not take back the property. It is important to call the mortgage company as soon as you know you can't make your payment, even before it is due.
Ignoring the problem will waste precious time.
Communicating with the mortgage company up front can will often keep them from filing for foreclosure, giving more time to sell the home short. Of course the longer you hold off the mortgage company from filing for foreclosure the longer you can live in the home. Don't move out assuming it's hopeless, this can make matters worse. It won't necessarily be easy talking to the mortgage company at first but be persistent. Keeping the lines of communication open can often hold off foreclosure and keep you in the house longer.
So whom do I talk to at the mortgage company once I know I can't make my mortgage payment?
The first department you will talk to is likely the payment center 800 number on your statement. They won't necessarily know what to do when you call since they deal in payments not the foreclosure process. Ask whom you can talk to in their "loss mitigation or short sale department". You may need to call around a bit to get in touch with the right people. The number you first call may just be a mortgage servicer or the mortgage may be insured and they won't be handling the short sale process. Many mortgage companies will not do anything until they realize the payment has not been made, but knowing who to call once that happens will put you ahead of the game. The mortgage company will assign a short sale coordinator/negotiator once they have the information on your loan in hand. This process is often handled by an outside company the mortgage company hires to handle their short sales and foreclosures.
What about my credit and taxes?
A short sale will lower your credit score but in most cases not as much as a foreclosure. It will be easier to repair your credit with a short sale scenario. The mortgage company will likely write off the deficiency and the IRS will then want income tax on that amount. There is new legislation that will help you avoid paying taxes on the forgiven debt. The Mortgage Debt Cancellation Relief law H.R. 3648-Public Law 110-142, will not require a borrower to pay income tax on the forgiven debt through Dec 31, 2009. Some restrictions are applicable so everyone should talk to his/her tax advisor.
Put the house on the market!
The most valuable advice I can give you is to talk to a real estate broker that is experienced in handling short sales. You can put the house on the market even before you have been assigned a short sale coordinator/negotiator. An experienced realtor will know how to get you through this process successfully. The mortgage company will be easier to work with if you have a viable offer on the table. An experienced broker will also help you weight your options. You may be a candidate for a loan modification, in which you can stay in your home and have your principal loan amount or rate reduced, thereby reducing your payments.
This is not the answer for everyone but should be considered. An experienced broker can take the headache of talking to the mortgage company off your plate and he/she will know what to say get the job done. It's important to know state foreclosure processes and procedures. Knowing how to extend a public sale date for example can be crucial when the deal is almost done and you just need a little more time. Using the right real estate broker will not only help you get the job done it will help alleviate your stress in what is always a very stressful process.
Luther Benson is the Broker/owner of Access Real Estate Professionals inc and has been a top producer for 18 years in residential real estate in the Colorado Springs and the Pikes Peak region. An expert in REO, foreclosure, resale, and new properties.
See all homes on the MLS at: http://www.accessrealestatepros.com.
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