Dear Liz: Two years ago we moved to another state. Our old house hasn’t sold in that time, as the housing market there is terrible. We have it listed for $255,000 and owe $242,000. A recent appraisal came back at $190,000 to $205,000 despite the fact that it’s in good condition and only 11 years old. We were thinking we should do a mortgage release on the property to get rid of it as we just can’t keep up the mortgage payments any longer. We didn’t think a short sale would work because there’s been no interest yet on the property. Any suggestions?
Answer: What you’re calling a “mortgage release” is actually a foreclosure, and it would devastate your credit for years to come. That may turn out to be the best of bad options, but explore others first.
Perhaps there’s been no interest in your property because the asking price is too high. Talk to a real estate agent with experience in short sales about what listing price is likely to generate offers. A short sale would hurt your credit scores, although perhaps less severely than a foreclosure if you can persuade the lender not to report the deficiency balance (the difference between what you owe on the mortgage and the sale price). The advantage of a short sale is that you’d spend less time in mortgage lenders’ “penalty box” and may qualify for another loan within two years.
How about someone who’s current on the mortgage and doesn’t want to default on payments to trigger the ability to do a short sale? The market is not terrible for home sales, but recent comps in the neighborhood are absurdly low and the value of the home is about break even with the mortgage. Any options there other than to stop paying the mortgage and default?
Lenders are a lot more cooperative about short sales than they were a few years ago. You don’t have to fall behind. Talk to a real estate agent in your area who is experienced with short sales and make sure your agreement is reviewed by a lawyer.
Shouldn’t they at least explore the possibility of renting their home?