Q: I lost my job in Atlanta, but I have been offered a position in another state. I am currently working with a real estate company trying to sell our home. I am underwater and will need to work with my lender to approve a short sale.
Should I continue to make all payments as required? I have heard yes and no answers from several people. I can make my payments on the house, but am in need of funds to move and rent a home.
A: We’re sorry that you are losing your job in Atlanta, but we’re relieved that you have received another offer. Unfortunately, getting rid of your house won’t be pain free.
When you do a short sale, you will hurt your credit, and that will prevent you from buying another home for two to three years, unless you can bring enough cash to the closing to make the lender whole. If you stop making payments to your bank, you will further hurt your credit history and credit score.
Assuming you don’t have cash available to pay the lender in whole, you may want to rent or buy another home in your new location before listing this property for a short sale. If there is a chance you will want to keep this property as a rental, you should try to do a HARP refinance before you move out, to take advantage of today’s low borrowing costs. That might ease the financial strain and allow you to have a renter cover your costs.
If you must sell, you can contact the bank and ask what short sale price the bank would agree to, and then see if that matches what homes are actually selling for in your area.
For example, if the bank says it will take $100,000 in a short sale, but you know homes are only selling for $75,000, then no matter what offer you bring to the bank, you might not get the bank’s approval.
At that point, you can simply try to hand the property over to the bank and do a strategic default. Some people simply handle the situation by failing to make any further payments and forcing the lender to take the property back through foreclosure.
As for your mortgage, you should continue to make your payments, particularly if you can see yourself paying off the deficiency at closing (thus preserving your credit). Making payments on time is crucial if you are going to refinance under HARP, because a late payment for the prior 12 months will disqualify you from the program.
Beyond that, the bank may ask you to use every available financial resource you have to pay off the loan, other than qualified retirement accounts such as a 401(k) account. If you have a pot of money sitting there and aren’t using it at least to stay current, the amount you owe on the loan will only grow.
A good attorney can help get a deficiency waived forever. If you are going to let the house go into foreclosure, then at some point you may want to stop making payments. Many lenders know that borrowers don’t have the money to pay the deficiency after a short sale, and they are waiving any claim for future money from their borrowers without even being asked for a waiver of the deficiency.
Just be aware that current tax law treats a waived deficiency as though you earned that amount of money as income, though the IRS is not making anyone pay taxes on primary home deficiencies through the end of 2012.
If you stop paying on the mortgage now, you could end up paying tax on those missed payments in the future. So if you are going to let your home go into foreclosure or do a short sale, make sure it is completed by December 31 or you may have a perfectly awful tax bomb waiting for you when you file your federal income taxes in 2014. And, of course, your credit score and credit history will take a dive.