Homeowners who are losing sleep under the crushing weight of a delinquent or unaffordable mortgage are often faced with the quandary of how to get out from under the mortgage.

Should they try to keep it? Walk away? And if they walk away, what’s the best means of doing so? Let it go to foreclosure? Surrender it in a bankruptcy? Will they ever be able to buy a home again?

Lenders may or may not modify, but even when they do it takes many months and by the time the modification is approved the delinquencies are so overwhelming that accepting the modification only makes the homeowner more upside down in their loan. A foreclosure is a viable option, particularly if there is only one mortgage. However, if there are equity lines or other junior liens, the lender may have the right to sue the homeowner for a deficiency judgment to collect on the unpaid portion of the debt. Also, a foreclosure wreaks havoc on your credit score and will prevent you from qualifying to buy another home for at least 4 years. Filing a bankruptcy to surrender the home is a good option, especially if there is more than one lien, because it protects the homeowner from any future collection efforts on junior liens (with a few exceptions). However, a foreclosure proceeding typically still takes place, so the debtor has both a bankruptcy and a foreclosure on their credit report. Then there is the short-sale.
 

What is a short-sale?

To begin with, a short-sale is when you sell the property for less than what is owed on it. I typically tell my clients whether or not they attempt to short sell the property is a matter of their own personal priorities.

To figure out whether or not to short sell your property ask yourself:

• Are you most concerned with minimizing damage to your credit?
• Do you have overwhelming unsecured debt that will likely force you into bankruptcy anyway?
• Do you wish to remain in the house for as long as possible?
• Do you just want to walk away and get rid of all your debt as soon as possible so your phone will stop ringing and you can get on with the business of rebuilding your life?
• Can you endure six months to a year of submitting financial data and purchase offers over and over again?
• Are there junior mortgages

What is the benefit of a short-sale?

The benefit of the short sale is that you will not have a foreclosure on your credit and you will qualify for a new loan in about two years (assuming financial stability and income). Also, because it does take so long for lenders to review and approve short sales you could remain in the home without paying your mortgage for many more months. If the house is your only debt and you have time and patience a short sale is likely your best option.

For more details on short-sales, see the after the jump.