I Avoided Foreclosure and Saved My Credit With This Last-Ditch Option
- It's terrifying to be unable to afford your mortgage payments.
- There are several options for you to consider in this situation.
- If you can opt for a short sale over a foreclosure, it will hurt your credit less and you may end up with a little money.
Short-sell the house, take the money, and run.
My history with homeownership hasn't been great, but I am hoping to change that in the next few years. My first and only shot at it so far ended after just two years, when I went through a job layoff and got divorced within a few short months, and later moved to another state for work. One way or another, I needed to get out from under my house.
I had attempted to sell the house not long after I initially moved out, but I got no offers and my ex-spouse decided that he wanted to stay in it, despite not being able to afford it. I got the house put into forbearance (a loan modification that consists of pausing or reducing your mortgage payments for a period of time). After a long period of unemployment during which I was trying to find a new position in my field, I returned to my home state to stay with friends and plot my next move. I ended up getting a job in yet another state two months later, and moved again. So I was dealing with the whole situation from 500 miles away, sight unseen.
A bad option
By the time I was in talks with my bank about getting out of my mortgage, I was expecting that foreclosure was going to be my only option. Foreclosure occurs when a mortgage lender goes through the legal process of taking your house back because you are delinquent on payments. They then sell your former home to recoup their losses from those missed payments. It's a very scary experience to know that you can't afford a financial responsibility. Foreclosure also damages your credit score for several years. In fact, foreclosure is second only to bankruptcy on the list of the worst things to happen to your credit.
A better option
My mortgage lender was willing to work with me on a short sale, though. A short sale ends up with the same results as a foreclosure: you no longer own the home or owe money on it. However, in a short sale, a homeowner works with their lender to get the home sold, rather than having it seized from them and sold at auction. The lender generally pays the costs of selling the house (and advertises the home as a short sale), and gets to keep the proceeds, sometimes forgiving the loan given to the former homeowner.
Sometimes the now ex-homeowner will qualify for a chunk of money, known as a seller incentive. Note that a short sale isn't a clean slate: Your credit may still be seriously impacted, and it takes years for the short sale (which will show up on your credit as a settled mortgage loan or an account paid in full for less than the full balance) to fall off your credit report. And you may owe taxes on the debt that has been forgiven, unless you can qualify for a tax break.
My short sale
The process of erasing my mortgage debt was not without its hiccups. I had to vet a real estate agent that I'd been connected to by my lender. Thankfully, he turned out to be a sharp cookie and understood that I had physically moved on from the house. But I did have to shell out a pile of money and a lot of my time over the months it took to get the house sold. I ended up having to pay for cleaning and groundskeeping to give the house curb appeal. I remember the many phone calls and emails to the agent and to the mortgage lender, wishing and hoping that someday soon the process would be over. Thankfully, it finally concluded, and I got a pleasant surprise.
Money for a life reboot
It turned out that I qualified for a little over $8,000 as a seller incentive from my mortgage lender. I was ecstatic, I put the money in the bank, and when I ended up getting a new job a few months later, I was able to pay for yet another out-of-state move and all it entailed. I consulted with an accountant when I filed my taxes for that year to ensure that I wouldn't owe taxes on the debt forgiveness. Thankfully I qualified for a tax break under the Mortgage Forgiveness Debt Relief Act of 2007 (which was in effect until 2017). This allowed me to exclude that "income" that was in the form of canceled debt.
It's been several years since I went through the short sale process. My credit is now better than it was before I bought the house, and will continue to improve from here. I learned a lot from my short sale, and if I get to become a homeowner again, I will go into the process older and a lot wiser when it comes to money.
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