Selling your property may be an option if you can downsize. If you have some equity and can purchase a smaller house or if you can actually rent below your current payment, selling is a great option. Your major concerns will be getting the best agent to get the best price in the shortest possible time and to work with your lender to postpone a foreclosure until the sale is made.
If you are in a situation where the value of the house is less than the amount owed, you’ll be in a ’short sale’ situation. The lender has the right to ask you to pay the balance. If you are willing to provide them with documentation of your financial hardship and the value of the home they may forgive the difference. You should expect to make formal application for this to happen and to jump through their hoops. Remember, you are the one asking them to let you out of a contract you freely agreed to. If you approach a short sale from the perspective that the mortgage company owes you something, you will get yourself in trouble. If you want a short sale to happen, you need to be ready to cooperate.
If you do succeed in getting the balance forgiven, you won’t receive any of the sale proceeds and there may be tax consequences to the debt forgiveness. I’ve heard the question, “What about my equity?” in many of these cases. The answer is “You don’t have any equity.” Equity is what’s left after the loan is paid off in full. In a short sale, the loan isn’t paid off in full. Insistence on getting some “equity” or even “money to move on” will torpedo a short sale every time.
What about the tax consequences? Well, the amount forgiven may be considered income to you by the IRS. The lender will write off the bad debt as an expense and in order to claim the expense they have to report it to the IRS. Part of the IRS reporting requirements are that they report your name and social security/tax id number. This will likely be considered as taxable income to you.
Finally, you need to consider the fairly obvious problem of where you will live if you sell. Too often I encounter people who have been foreclosed on a $500/month mortgage payment in our $450/month rental market. For the savings of $50/month they’ve given up their equity and potential appreciation that are the foundation of future financial security and ruined their credit. A short sale will put you in a little better situation, but not much. Even if you have no equity, before you sell you should consider both how much more it may cost you to rent and the loss of future appreciation on the property. Even if you have negative equity today, in a rising market and with regular payments you may have substantial equity in five or ten years if you can stop the foreclosure and get through the situation.
