There are things you can do to help prevent foreclosure. If you anticipate having trouble making payments, contact your lender immediately and explain your situation. Your lender may be willing to come up with a new payment plan that takes your current situation into consideration. You may be able to refinance the loan, extend the term, or spread the missed payments out over several months. Your lender may also offer temporary forbearance, meaning you can pause payments for a few months until you’re able to start making payments again. If you have an FHA or VA mortgage, you may have other alternatives as well. Your lender doesn’t want to foreclose, but they can’t work with you unless you communicate with them.
Short sales help homeowners experiencing financial distress quickly sell their homes for less than the outstanding mortgage. To get this process started, contact your lender. Generally you (the homeowner-seller) will qualify for a short sale only if you can demonstrate financial hardship and a house that is “underwater” financially, meaning the current market value of the property is less than the mortgage balance. The lender agrees that the sale proceeds will satisfy the full mortgage, even though it’s less money, and forgives the balance. (If the lender doesn’t agree to do that, you’ll be on the hook for the remaining balance of the loan, and the lender can sue for payment.) Financial hardship can be due to death, disability, divorce, unemployment, bankruptcy, or other life-altering circumstances. Many lenders prefer a short sale to a loan foreclosure because they usually recover more money with this option.
Usually if a debt is forgiven, that amount will be included in the debtor’s taxable income under most circumstances. However, the Mortgage Forgiveness Debt Relief Act of 2007 gives debtors relief from this provision if the loan qualifies as qualified principal residence indebtedness; this remains in force for any qualifying mortgage debt forgiven in a written agreement entered into through December 31, 2020. If a portion of your mortgage debt was forgiven, your lender will send you Form 1099-C, which you’ll include as part of your income tax return for the year.