There are better alternatives than defaulting on a mortgage obligation.The decision to default may seem like the only alternative for many homeowners who have lost their jobs or are experiencing personal problems such as illness or divorce, but homeowners should carefully consider how such a decision might affect them in the long term. •Negative credit rating. Defaulting on your mortgage can affect future access to credit and negatively impact your ability to rent or buy a home. It can also make it harder and more expensive to buy or lease a car and maintain a small-business line of credit, and could cause your creditors to reduce your existing credit lines. Now that some employers use credit checks in making employment decisions, it could even hurt opportunities for future employment (60 percent of employers now check credit records, up from 40 percent four years ago, according to the Society for Human Resource Management). •Debt doesn't always go away. By simply walking away from your obligation, you might end up with a large tax bill. However, by working with your lender, any debt forgiveness on your primary residence may not be taxable due to the recently passed Mortgage Forgiveness Debt Relief Act. You should consult your tax professional for background on this tax provision and to understand the potential impact to your individual situation. In some states, even after foreclosure, lenders can seek repayment from you for the mortgage if you have the ability to pay the remainder. If you have a second mortgage, often called a "piggyback," in those states where deficiencies may be pursued, the bank may also seek payment on the second loan balance. If you owe back taxes, your municipality may turn your delinquent taxes over to collection agencies for repayment. •Benefits of home ownership are lost. Balance the cost of renting with the benefits of homeownership. U.S. tax laws still favor homeownership. If you itemize for tax purposes, you will lose the mortgage interest and property tax deductions. Your rent payment may not be lower than your mortgage payment, particularly when you factor in the tax benefits. Meanwhile, as the market recovers and housing prices begin to appreciate, landlords may charge higher rents, so you could miss the long-term upside of a recovery. Ask your lender about making your mortgage more affordable through a modification plan that could include reducing your interest rate, deferring the amount of principal on which interest is accruing or lengthening the amortization term. Modifying your mortgage may create an affordable payment that makes your monthly expenses comparable with prevailing rents. •Community is impacted. If you default on your mortgage obligation and your home goes into foreclosure, there are negative impacts on the neighborhood. Foreclosure lowers neighboring home values further. It also affects schools and city services through lost tax revenue-something to consider if you want to stay in the community. If homeownership is not an option, there are other alternatives such as a short sale or deed in lieu of foreclosure. A short sale is when a property is sold and the lender agrees to accept a discounted payoff. A deed in lieu allows the transfer of a property to the lender without going through the foreclosure process. These alternatives are last resorts, and may follow other options such as an attempt to sell the property. Check with your tax professional regarding your individual tax situation. Seek Help Contact a HUD-approved housing counselor or call (800) 569-4287. These resources can help review your family budget and propose solutions designed to help you afford your home. For more information on foreclosure facts, alternatives and where to find help, visit www.homesafepmi.com.
********** Published: June 4, 2010 - Volume 9 - Issue 7