I’m in Default! Can I Sell My House?

Can I Sell My Home in Default

New homeowners may never think of defaulting on their mortgage, but life has a way of surprising everyone.  People who ran into financial trouble in 2008 and had recently bought houses can attest to that.  If circumstances push you into default, what can you do?  Are you allowed to sell your home, or do you have to resign yourself to foreclosure? 

It turns out if you understand what default is, you will see that there are several options available if you can’t make your payments.  

What is Default?

In simple terms, default is a failure to repay a debt.  There are several different types of debt, but a mortgage is typically called a secured debt; that is, the value of the asset purchased by the loan money secures the loan for the lender.  In simple terms, the lender can take your house and sell it to get their money back if you don’t pay them. 

What Options Are Available to Get Out of Default?

Although many people think they need to sell their homes if they are in default, this may not be the best choice.  There are several options for people who default on a mortgage and selling your home may be a last resort.  For most people, their home is their biggest financial asset, and it should remain intact if possible.     

Loan Modification

For people who struggle each month to make their payment because their income is too low, the lender may agree to change the terms of your mortgage.  A loan modification is when the lender agrees to lower monthly payments in return for a longer repayment period and higher interest rate.  Although this can lower your credit rating, it does not do anywhere near the damage of a foreclosure, and many people have found loan modifications to be an effective way of getting out of default.

Forbearance

Sometimes unforeseen circumstances completely disrupt someone’s income, and they are unable to make payments at all.  In those circumstances, the borrower could ask for a forbearance, a period when no payments are demanded.  A forbearance has the advantage of not harming your credit.  For people who believe their financial difficulty is temporary, forbearance may be the best option to get out of default.

Sell Your Home

It is possible to sell your house when you are in default; however, it should not be the first option you consider.  If neither a loan modification nor forbearance can work for you, then you may need to sell.  Ideally, you should sell your home for more than you owe, in which case you can pocket the difference.  But if the value of the property has collapsed since you bought it, you may be underwater on your mortgage, in which case you would need to convince your lender to support a short sale.  A short sale is never a good option, but it is less damaging than a foreclosure.     

Modification, Forbearance, or Sale: Choose Carefully

Life is unpredictable, and circumstances can conspire to land you in default of your mortgage.  If that ever happens, remember to protect your largest asset, your house, as much as you can.

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*Disclaimer: This material is provided for information purposes only and is not to be construed as investment or tax advice. Readers are strongly advised to consult with their professional advisors regarding the information herein.

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