Being unable to pay your mortgage puts you in loan default which, left unresolved, could result in losing your house. Mortgage lenders offer several options to help you get back on track, such as loan refinances, modifications or forbearance agreements, but they may not work for you. As an alternative to foreclosure, you may be able to voluntarily forfeit your house through either a lender-approved short sale or a deed-in-lieu of foreclosure.
Home Affordable Foreclosure Alternative (HAFA)
The Obama Administration’s Making Home Affordable plan, announced on February 18, 2009, was designed to help resolve the housing crisis being experienced by the U.S., and includes the Home Affordable Foreclosure Alternative (HAFA). HAFA provides two options for you to exit your defaulted mortgage loan, but you must meet several eligibility requirements to qualify. If you are a qualifying borrower, HAFA encourages lenders to allow you to sell your property for less than your mortgage balance, or execute a deed-in-lieu of foreclosure, voluntarily returning your house to your lender.
If your mortgage lender allows you to sell your house for less than the outstanding balance of your loan, it is considered a short sale. The remaining amount due, after sale proceeds are applied against your loan balance, is considered the deficiency. In many states, the deficiency is cancelled and your lender has no recourse to pursue you for a deficiency judgment. While living in a non-recourse state has certain benefits, the deficiency amount may still be considered debt forgiveness for tax purposes. Outside of the provisions allowed by the Mortgage Debt Relief Act of 2007, which according to the IRS, “applies to debt forgiven in calendar years 2007 through 2012,” you may still be liable for paying income tax on the deficiency balance.
If you are unsuccessful at completing a short sale, you may still be able to voluntarily relinquish your house to your lender by signing a deed-in-lieu of foreclosure; however, if there are any other liens against your property, such as a 2nd mortgage or personal judgments recorded against you or a co-owner, your lender most likely will not accept a deed-in-lieu. If your property does have junior liens, your lender may choose to complete the foreclosure process, which by design will eliminate most of them, leaving your property free and clear of encumbrances.
Benefits and Drawbacks
Benefits, such as lower costs and not waiting as long to reapply for a mortgage loan, do exist if you execute a short sale or deed-in-lieu, rather than going through a full-blown foreclosure; however, it can also prove to be very difficult to receive approval from your lender for either of these processes. For example, a lender may not approve a short sale unless you already have an approved buyer for your property. They also may not want to accept a deed-in-lieu, especially if they already have a large existing portfolio of other forfeited property.
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- hud.gov: Obama Administration announces new details on Making Home Affordable Program.
- makinghomeaffordable.gov: Home Affordable Foreclosure Alternatives (HAFA) Program.
- irs.gov: The Mortgage Forgiveness Debt Relief Act and Debt Cancellation.
- hmpadmin.com: Home Affordable Modification Program: Overview
- Joe Raedle/Getty Images News/Getty Images