Mortgage Agreement Exit Strategies: What’s the Best Option for You?

So, you bought a house, put down around 20%, and got a mortgage loan from the bank for the rest. As time goes by, you realize due to hardships and the effects of the economy, you are having a hard time paying off the loan and interest on the house. These factors are more common than you think, especially for first time home buyers who may have gone over their head with the monthly costs of not only paying the mortgage, but the upkeep of the home as well. Here is the main reason why there are options to choose from when a person needs assistance being released from all or a part of their mortgage agreement.

Let’s first dive into why these exit strategies are in place; especially for those who are having difficulties making payments on their high mortgage rates and remaining costs. The economy itself has had an enormous effect on the ability to afford a home these days. You would think after the “Great Recession” back in the early 2000’s that we got through, financial stability would be a bit better in this country. Which to some affect this is true, as new jobs are being created through means of technology and consumers are being more proactive in the entrepreneurship culture. However, with issues of growing inflation, lower wages, and now higher taxes on products through tariffs, it is becoming more challenging to maintain a standard cost of living on top of being a homeowner in this economy. We have not even factored in the most common reason individuals can’t afford their homes. It is due to being laid off of work, illnesses that cost a lot to maintain hospital bills, fluctuating medicine cost, or even having a divorce with a spouse which can affect the household income greatly.

After all this you may ask, okay so what are my options if these are my circumstances? Well, you have a few to choose from, but realistically you are limited, so it is always a good idea to reach out to a lawyer and your realtor for the best option depending on how severe your situation is. Now here are your options: you can proceed with a short-sale, file bankruptcy or risk foreclosure on your property. Now let’s be honest, no one wants to be in a position where they must choose how to lose their home. Although, if it is really hindering you, then this process must be done.

It’s very common for at-risk homeowners to choose to file bankruptcy as they may feel they have no other options to escape the pile of debt they have acquired. As this may be, bankruptcy is a way to remove the financial responsibility by surrendering the home to the bank as a choice instead of being forced to like in foreclosure. Filing bankruptcy can also have a greater impact in the long run as it may ruin your credit or your chances of buying another home sooner than later. Before you even think about filing for bankruptcy, the first option would be to try to negotiate a short sale with your lender. A short sale is when you ultimately want to sell your home for a lesser amount than what it is worth and what you owe on the remaining mortgage. Now this may seem like a piece a cake, but you must persuade the lender to release what is called a “mortgage lien,” which is the agreement you made with the bank to pay off the loan amount when you first purchased the house. There are several things you will need to showcase for this process to be approved. There needs to be a reason why you are requesting the lender to allow this short sale to be in effect.  Whether it’s financial instability due to pay reduction regarding a divorce or a sickness that needs attention, then you will need show documentations that this in an ongoing issue. You may also have a way to win the lender over if you feel you were not fully educated due to lack of home buying education or were taken advantage of by an agent. This may be harder to prove. However, it could help validate why you want out of your mortgage agreement.

Once your short sale proposal for the mortgage lien is released, you can sell your home to help get rid of your mortgage responsibility. I must tell you that just because you have made a sale does not mean that the lender will let you off the hook cleanly. There may be some taxes you must pay from the sale and be held for what is called a “deficiency balance.” This balance is the difference between the short sale amount against what the remaining total mortgage loan was contracted for. So, in this instance, if the home was sold for $80,000 from the short sale but the mortgage was $125,000 originally, you may still be liable for the remaining balance of $45,000. Now, no one said this would be a clean deal, but it can help lower some stress of paying more for a home than a person’s yearly income can’t afford.

The last thing you want to do when trying to escape mortgage responsibility is file for foreclosure. This is would be the last resort if all other options do not fall through. Foreclosure and bankruptcy are very similar in the process of forfeiting your home to the lender, although foreclosure can be a bit messy and have long lasting complications on your credit report. When a house goes under foreclosure it is usually not by choice. The home is sold at an auction so the bank can make some of its money back through fast liquidation of the home’s assets. This is not what you would want to happen to you, trust me! Some people are forced out of their homes and not only that, the proceeds from the sale are tacked onto the amount you owed on the mortgage. So, it’s double trouble essentially! You may not owe the whole amount, but you will most definitely have a higher deficiency balance if the sale was lower than the total mortgage, which we discussed earlier.

All of this is to say, if there is a possibility you may not be able to keep up with your mortgage payments, then you should seek advice from a real estate professional such as, Keith Lawrence to discuss your immediate options.

Refer to these references below for more information:

https://martellalaw.com/short-sale-foreclosure-or-bankruptcy-which-is-best-for-my-credit-score/

https://www.investopedia.com/terms/r/real-estate-short-sale.asp