Not every situation can be resolved through your lender’s loss mitigation programs. If you learn you will not be able to keep your home, or if you don’t want to keep it, and you don’t have sufficient equity to sell it and pay off your mortgage(s) in full, consider:
Assumption of the loan. If you have an assumable loan (look for a “subject to transfer” clause in your loan agreement), it is conceivable that you could transfer your property to a new buyer who agrees to take over (assume) the existing mortgage. Assumable loans are very rare, so this will be an option for only a small fraction of homeowners.
Lender-approved sale. Your lender might hold off on foreclosure proceedings for an agreed upon time to give you a chance to put your home on the market. Or it might postpone the foreclosure sale if you have a pending sale contract.
A short sale. This is also called a pre-foreclosure sale on FHA loans. The lender may allow you sell the home yourself before it forecloses on the property, agreeing to write off any shortfall between the sale price and the mortgage balance. This enables you to avoid a damaging foreclosure on your credit report. You may face a tax liability on the amount of debt forgiven.
Deed in lieu of foreclosure. You voluntarily transfer your property title to the lender (with the lender’s permission) in exchange for cancellation of the remainder of your debt. Though you lose the home, a deed in lieu of foreclosure is less damaging to your credit than a foreclosure. However, you will lose any equity you may have had in the property and you may face an income tax liability on the amount of debt forgiven. A deed in lieu may not be an option for you if there are other loans or liens against the property.
Some states allow lenders to pursue a deficiency judgment, which means that the borrower is personally responsible to repay any remaining balance on the mortgage after a foreclosure sale. California law does not allow deficiency judgments on "purchase money mortgages" (any mortgage used instead of cash to buy your primary residence). A certified HUD housing counselor can tell you if deficiency judgments are allowed in your state.
If you can predict you’ll have serious, irresolvable payment problems in the foreseeable future that could lead to foreclosure, consider selling your home before you go into default.
This works if you have enough equity in the home to pay off the entire loan balance and all expenses associated with selling the home (such as real estate agent fees) from the proceeds of the sale. Such a sale would allow you to satisfy your mortgage obligation, avoid lender-imposed late and legal fees, avoid any damage to your credit rating and protect what equity you have in the property.
This brochure was created by Consumer Action’s Housing Information Project. © 2007 Consumer Action. Rights Reserved.