Alternatives to foreclosure: Make sure you know what your options are.

With a short sale you get the authorization from your lender to sell your house for an amount that will not cover the total amount of your loan. In exchange, the lender will release the lien on the property. In many states the lenders have the possibility to sue the homeowner to recover the remaining deficiencies, which is not the case of California. Even if you sell your house for less than it is worth, the lender won’t be able to go after you to recover the deficiencies. The main issue with a short sale is that it is up to you to find a buyer that will be willing to pay a price that will satisfy the lender, which is not the easiest thing to achieve these days. Also, the lender must approve the buyer before the transaction can be complete. Another difficulty can be the existence of other liens on the property. Indeed, you will have to convince any junior lienholder as well to accept the short sale, which will definitely not be easy, as the sale will produce little to no money for a second or third lien holder.

With a deed in lieu of foreclosure you transfer your home (“the deed”) to your lender in exchange for your lender cancelling the loan. The lender will promise to not initiate any foreclosure proceeding or to stop any existing foreclosure proceedings. The lender will also probably require that you try to put your house on the market (usually 3 months are required) prior to accepting the deed in lieu of foreclosure, to increase his chances to sell your house. The good news is that if you don’t manage to sell your house during this period of time and the lender accepts your deed, the lender will have to sell it for you. Lenders really reluctant to do this since they prefer cash to real estate and know that it won’t be necessarily easy for them to sell your house.
Both options might come with an unwelcome surprise though: the IRS treats forgiven debts as taxable income subject to regular income tax. Make sure you are aware of that before you make your decision.

Another option is the voluntary foreclosure- also called the “walk away”. This is when the borrower realizes that the amount owed to the lender is greater than the value of the house and voluntarily makes the decision to stop the payments. The main problem with this option, aside from any moral implication, is that it could have a very bad impact on your credit scores.

As another option you might want to consider renegotiating your loan with your lender. Indeed, keep in mind that lender don’t necessary want to go through a foreclosure process either and might agree to renegotiate your loan with you in order to make it more affordable. If you choose this solution we advise you to consult the Making Home Affordable Website to find a free HUD-approved counselor. With the assistance of the counselor you may be temporarily relieved from having to make your monthly payments; develop a plan to catch up with your missed payments; negotiate a lower interest rate or even renegotiate a reduction in your principal loan balance.

You could also consider filing for bankruptcy, chapter 7 or chapter 13 (see our newsletter of January 2014 or our website for more details).