With the crisis in the real estate market, the American dream of homeownership has come to an abrupt end. Lots of people have lost their homes in foreclosure and many more are delinquent on their mortgage payments. Most people are facing such a situation mainly due to job loss. However, there are some homeowners who can afford their mortgage but are struggling to make their payments. Such borrowers are tempted to walk away from the property in order to make a fresh start.
However, walking away from property is not a very good option in my opinion as it would ultimately lead to foreclosure. Take a look as to how it can affect you:
Credit effects: If you walk away of the property, it will result into foreclosure. The lender would sell off the property to recover his dues. You would be responsible for paying the deficient amount. It will lower your credit score by 250 points and you won't be able to get a loan for the next 3-4 years. Moreover, the foreclosure would remain on your credit report for the next 7 years.
Tax penalty: If your lender forgives the deficient mortgage balance resulting from the sale, then you will have to pay taxes for that forgiven amount. The balance amount would be considered as your income and the IRS will charge you the income tax. However, with the Mortgage Debt Relief Act in vogue, you won't be liable for paying the taxes on the deficient amount from the sale of your primary residence if the debt was incurred between 2007 and 2012. After that, the taxes are planned to kick back in.
So, you must be thinking that there's no respite. No one's there to help you from this mortgage mess, isn't it? However, that's not the case. You can get help provided you take the right step at the right time. Just have a look:
Help from the Government: If you are facing difficulty in paying off your mortgage dues, contact your lender for a Home Affordable Modification Program (HAMP) or the Home Affordable Refinance Program (HARP). Both these programs are designed in such a way that it would help you in saving your property.
Reverse Mortgage: If you are 62 years or more of age, then you can apply for a reverse mortgage in order to save your property. However, in order to get a reverse mortgage, you should have some equity in the property. This would help you get a tax free income and won't be liable to pay off the dues monthly.
Short sale and deed in lieu: These are two other options to avoid foreclosure. In both the processes, you'll have to transfer the property to your lender who would sell it off and recover his dues. However, in a short sale, you would be responsible for the deficient balance and your credit would get lowered by 80-100 points. In deed in lieu of foreclosure, you won't be responsible for the deficient amount but your credit would get lowered by 250 points.