If you are having trouble making your mortgage payments on time, or if your house is worth less than the mortgages against it, then you know that you can’t sell or refinance the house.
But what if the payment is too much, or you want to move?
You might feel stuck in the house.
So what are your options?
1. Keep paying the mortgage
You might be able to keep paying on the mortgage until the housing market recovers and you can sell the house for a profit.
But this is slow, and it is possible that the house might continue to lose value, especially if it is in a bad neighborhood.
2. Stop making payments
You could stop making the payments and let the bank foreclose.
3. Short sale
You can talk with the bank about a short sale.
Is a short sale the best idea?
Many people think that a short sale is best, because they like the idea of working with the bank.
What they don’t understand is that the bank doesn’t want to work with you.
The bank wants to make money, and as soon as you stop making money for the bank they lose all interest in working with you.
They may:
- Be hard to contact
- Make it hard for you to talk to the right people capable of helping you through the short sale process
- Decide that it is better to foreclose, and if there is a second mortgage, pursue you for a money judgment and garnish your wages to make their money
You will also have to clean up the house and make it look nice for any potential buyers, which can be difficult and potentially expensive.
What if you do make it through the short sale process?
If you successfully make it through the short sale process, and a buyer actually buys the house, then you have succeeded in selling the house, but if you might owe taxes on the forgiven debt.
There is a temporary tax law that says you don’t have to pay taxes on forgiven mortgage debt if the money from the loan was used to buy or improve your principal residence.
This law goes out of effect on January 1, 2013, so unless you finish the short sale by the end of 2012, you might end up with a big tax bill next year.
Whether you do the short sale now or in 2013, the IRS would probably only tax you if there was a second mortgage.
As of January 1, 2015 short sale forgiveness is taxable again.
For more information on tax in this situation, visit: www.irs.gov/uac/Home-Foreclosure-and-Debt-Cancellation.
So if you do a short sale, you will have to spend a lot of time dealing with your bank, and cleaning up the house to make it nice to sell to buyers, and you might even owe taxes on forgiven debt.
What about forecolsure?
Foreclosure is usually better for the homeowner because foreclosure law has many consumer protections built into it.
- In Minnesota, it is not uncommon for someone who has stopped making their mortgage payments to be able to continue to live in the house for over a year, all the time without making mortgage payments
If you coordinate the foreclosure with a Chapter 7 bankruptcy or Chapter 13 bankruptcy, you will be able to stay in the house even longer.
This obviously allows you to save some money while you find a new place to live.
- It is not difficult to find a place to rent after a foreclosure or bankruptcy
- Landlords care more about whether you will be able to pay the rent in the future than what happened with a mortgage in the past
Foreclosure is also a very hands-off process from the point of view of the borrower, at least in Minnesota. A few months after you stop making the payments, the bank will come and put a notice on your door.
You won’t have to:
- Clean the place
- Work with realtors
- Leave your home whenever a potential buyer wants to look at it
In a foreclosure, you will also know at least 6 months in advance of when you have to leave the property. This six-month period is called the redemption period, and does not exist in a short sale.
- In terms of credit rating, a short sale is only a little bit better than a foreclosure. Both will require about 2 or 3 years before your credit recovers.
Conclusion
If you want to talk about what to do with a house that is hard to afford, or that you want to leave but can’t sell, there is no substitute for speaking with an experienced Minnesota bankruptcy attorney to guide you through the options. This article is not legal advice, and is for informational purposes only.
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