Right now, I am in the process of a cross-country move. As part of this move, my husband and I have decided to sell our home. We are fortunate right now in that we are under contract for a price that (barely) exceeds what we owe. A few weeks ago, though, we were concerned that we wouldn’t be able to sell our home for what we owe; we thought we would come up short. It’s what happens when you buy at the top of the market and then try to sell before the market is completely recovered in your area.
I began considering our options.
“If you can’t sell your home for what you owe, you can continue to live in it, rent it, or short sale it,” says Annie Bjerkestrand of RMG Real Estate in Anchorage, Alaska.
What can you do with your home?
The first question you have to ask yourself is what you will do to fit your needs. Since my husband is starting a new job on the other side of the country, living in our home isn’t really an option. We want to move as a family, and splitting us up while I try to get more for the house doesn’t fit our goals or lifestyle.
Another option is to rent it out. If you think that you could be a landlord, it might make sense to let someone else live in the home and pay the mortgage. That way, you build equity in the home without the need to make mortgage payments.
However, it’s important to understand what being a landlord entails before you take this step, especially if you move across the country. You will be responsible for maintenance costs and repairs. You might not be able to directly manage the property, so hiring someone to do it for you could become an option. The biggest downside, though, is that if you don’t carefully vet your tenants, you could end up with people who don’t pay on time, or who damage your property, reducing its value.
“It is a gut-wrenching process,” says Bjerkestrand. “Renting or continuing to live in the property are options that won’t affect your credit, though.”
The last option on Bjerkestrand’s list is to short sale the home. In this process, you work with the lender to sell the home for less than you owe. The lender accepts less, and forgives you the difference. “A short sale should be avoided at all costs,” says Bjerkestrand. “This is a solution only if you must get rid of your property and you can’t sell for what you owe.”
A short sale will impact your credit, bringing it lower. Additionally, you might end up with tax consequences for a short sale. The forgiven amount is considered income by the IRS is some cases (although the IRS does allow for some leeway in certain cases). Consult with a tax professional so that you understand the potential tax implications of going through with a short sale.
Interestingly, Bjerkestrand does have one more recommendation, added almost as an after-thought. “You can also get a line of credit so that you are able to bridge the gap between the sales prices and what you owe.”
Basically, if you want out of the house quickly, and you don’t want to accept the consequences of a short sale, you can pay the difference yourself. This is the route that my husband and I would likely take if we needed to. You can get another loan (if you have the available credit and a good enough credit rating) and pay off the difference in price, plus the closing costs and other expenses that come with selling a house. If you have a large enough emergency fund and don’t mind depleting it, you could also use some of the assets you have on hand to get the deal done without impacting your credit rating.
My husband’s new job pays substantially more than his current job. We expected this whole process to take a lot longer, so we figured we’d have a couple months to save up for closing costs (which the seller usually pays) and any difference between what we could get for the house and what we owe. However, things are moving quickly, and if this sale falls through, or if something changes, we have discussed the possibility of either a loan, or draining the emergency fund, since we could take care of the situation a couple of months after moving.
Since we have the resources to get rid of the home without damaging our credit, that’s the route we are going to take — no matter what happens. But not everyone is as lucky as we are.
Voluntary foreclosure: going to extremes to get rid of your home
Bjerkestrand’s suggestions aren’t the only possibilities, however. David Reischer, an attorney with LegalAdvice.com, points out that it’s also possible to take extreme measures if you don’t have other options.
“A person may decide to simply walk from the property and allow the lender to foreclosure,” Reischer says.
Voluntary foreclosure is subtly different from a “regular” foreclosure. In a more “traditional” proceeding, the homeowner usually can’t make payments because of some financial situation. A job loss or other financial setback might make it impossible to make mortgage payments. In these cases, the homeowner often tries to avoid the process, even if these efforts fail.
With a voluntary foreclosure, you decide to move on, even though you could, technically, afford your mortgage payments. You want out of the house, know that you can’t get what you still owe the bank for it, and you decide it’s preferable to just move out and stop making your payments.
If you take this step, though, you need to be aware of the possible ramifications. “A lender can still obtain a judgment for the full amount due,” Reischer points out. A lender’s options in the case of voluntary foreclosure depend on the state the home is in, so you want to double-check the laws before taking this drastic step. “A voluntary foreclosure will significantly and negatively affect your credit score as well,” he continues.
It’s not fun to decide what to do when you owe more than your house will sell for. Look at your options, and make a choice based on your individual situation. In most cases, there is something you can do get out of the house if you need to.