Just mailing the keys to the mortgage holder, aka “jingle mail”, and walking away is a bad idea. After all, you signed a contract to make payments on the home loan as agreed. If you find yourself unable to meet these obligations there a number of remedies you can pursue to discharge the home loan debt properly.

Naturally, you may feel frustrated with your situation. Many inexperienced borrowers found them tricked into taking on loans that they were obviously going not be able to pay back. Even experienced borrowers have been hurt by the boom and bust of housing prices. However, the excesses and mistakes of the past don’t discharge the debt. Even if you were a victim of predatory lending practices or out and out fraud, you still need to go through proper legal procedures. In short, you have to follow the rules in order to properly deal with your problem. Walking away from your home loan obligations isn’t following the rules. Remember, it is in both your best interest and the interest of the mortgage holder for you to stay in your home and paying a mortgage.

In some cases, you might be able to qualify for a loan modification that would allow you to stay in your home with a mortgage that’s been modified to better fit your financial situation. The government has recently created a $75 billion program to help people with out of control home loans. You should contact your mortgage company to discover if you qualify for this home loan modification program.

However, if you can’t qualify for a home loan modification then you will need to try for a short sale. This is where, with the agreement of the financial institution that holds the mortgage, you sell your home for less than what you owe, typically at the current market value, and the bank agrees to forgive the difference. These days it can be difficult to find a qualified buyer who can get a home loan even at the reduced prices.

In this case, the home loan lender may be willing to accept a deed in lieu of foreclosure. When this happens, you sign the house back over to the mortgage company and they forgive some or all of the debt you owe. You will need to work out the deals of this agreement with the mortgage holder. If at all possible you will want to have some qualified legal representation to help you through this process. Some former homeowners who’ve done a deed in lieu of foreclosure have found themselves still on the hook for thousands of dollars due to a bad agreement.

Another thing to understand about a short sale or a deed in lieu of foreclosure is that it will place a serious bad mark on your credit for several years. It will typically be 2-3 years before you can easily borrow money again for even small things like a credit card or vehicle and most likely 5-7 years before you can qualify for another home loan. Also, there are tax implications when a debt is forgiven. You may end up owning a big tax bill as well so make sure that you examine this aspect too.

If you can’t work out a deed in lieu of foreclosure agreement this only leaves foreclosure itself and bankruptcy. This isn’t a great option for either you or the mortgage holder. This is the result of a failed negotiation, either on your part, the bank’s part, or of both parties. My recommendation is that if you find your home loan in trouble that you begin seeking alternatives to foreclosure with your mortgage holder as soon as possible.

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First of all, remember that if you’re in danger of falling behind on your mortgage payments it’s best to be proactive and move quickly to resolve the situation. If you act early, you’ll face fewer consequences financially and emotionally. Delaying and ignoring the reality of the situation will only make things worse for you.

Most mortgage loans are due on the first of the month and the borrower typically has a grace period of 5 to 15 to make the payment without a penalty. After this grace period most lenders impose a late fee that’s typically 3 to 5% of the missed payment. Some mortgage lenders have gotten more aggressive in calling home owners during this period over the past year. They’re doing this to head off potential problems down the road and to get a feel for the borrower’s financial situation. Naturally, it’s best not to be late on payments simply to avoid the late fee. These fees can add up and hurt you financially, especially if you’re struggling.

At 30 days past due, the problem becomes more serious because the mortgage lender will report you to credit reporting agencies as being delinquent. This single report can drop an excellent credit score to a below average credit score although some evidence suggests that credit scores that are already average and below average as less affected by this. This black mark on your credit score will make it more difficult to qualify for new loans, including a refinance on the home. It will also make other loans, like auto loans, much more expensive.

Also, at 30 days, you will begin to get calls from the collection department within the mortgage lender’s organization. Their typical home loan relief option is for you to make your back payment and current payment now. If you’ve faced a temporary financial set back, such as a short job loss, natural disaster or medical expense, and you will be financially able to get caught up, this is the point where you might want to consider working out a forbearance agreement. This agreement will allow you to get caught up on the missed payment over a 3 to 6 month time frame while stopping the foreclosure timeline. Of course, if you don’t meet the payment commitment, the lender will probably move more quickly toward foreclosure.

The payment negotiation period typically ends after 3 mortgage payments are missed, roughly 90 days. However, some lenders have let this go for longer periods given the current state of the real estate market and general economic conditions. But the negotiation period ends when the mortgage lender files a “notice of default” with your local courthouse. They will send you a certified letter, usually from their law firm, stating that the the foreclosure process will begin unless you make good the missing payments plus late fees and legal fees, typically within 10 business days.

At this point in the foreclosure timeline you should have already contacted the loss mitigation department of your lender. Depending on the lender and the type of loan, they may be able to offer you loan modifications, longer term forbearance agreements and other ways to avoid foreclosure. If your financial situation won’t be good enough to avoid foreclosure, you can still negotiate slightly less damaging alternatives such as a short sale or deed in lieu of foreclosure. Once the legal notice is filed, most lenders become a bit more hard nosed since they’ve had to pay a law firm so it’s quite important for you to try to work out something before things get to this state.

Another thing that happens at this point in the foreclosure timeline is that the borrower’s credit score is further damaged. Public notices like a notice of default are picked up by credit bureaus and this will depress credit scores to the point that getting almost any loan is impossible.

Since the notice of default is a public notice this will also bring a slew of scammers and opportunists to your mailbox, phone and even to your home. You’ll get all kinds of offers to ‘help’ you out but most of them will be dishonest to one degree or another. Be very wary of entering into any kind of buy back or foreclosure prevention program, especially if they involve you making payments to a third party or signing over the deed to your home.

After the notice of default, the borrower typically has about 90 days to make up the payments and fees in full. In states where non-judicial foreclosures are used a “notice of sale” is presented to the borrower, once again from the lender’s law firm, and this notice is made public as well. This means that the house will be sold at the next available legal sale date in that state or locality, usually 15 to 30 days after the notice. In judicial states, the process is often different but will follow a common time line. In this case, it’s best to consult a local foreclosure attorney to get an understanding of a particular state’s legal procedures and foreclosure timeline.

Lastly, you can halt foreclosure prior to the sale date if you bring the loan current and pay fees. For most people in this dire financial situation it’s not possible but some people have been able to do this. Some lenders will delay the sale and reinstate the loan if a substantial portion of the payments owed are paid and an agreement is struck to pay off the remaining fees in a short time. Others may delay the actual foreclosure pending the closing of an approved short sale deal. Others won’t do this. Of course, foreclosure can be also delayed by filing a lawsuit against the lender or declaring bankruptcy but these are basically stalling the inevitable and only put off, and don’t stop, the foreclosure timeline.

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This new program, Making Home Affordable, that was pushed by the Obama administration should help millions of people  attain lower monthly payments and also avoid foreclosure. But, are there any strings are attached to the program? What are the credit score implications? Are there any tax implications? How could it affect your monthly payments? Are there any scams associated with this program? Let’s take a look.

One of the first questions people ask about the federal loan modification plan if their credit score will be affected. In general, a refinancing plan doesn’t affect your score since it’s just a rewriting of the terms of an existing mortgage loan. What negatively affects your credit score is missing payments. Under the new federal housing relief plan, one of the terms is that qualifying homeowners can’t have missed a payment during the past year. So, if you’ve missed a payment, the new program won’t help you.

It’s still too early to tell how much impact the this federally sponsored mortgage loan adjustment program. There are no credit reporting guidelines in place for these home loan modifications. It’s not even clear if they will be reported at all. However, most people who’re applying for this program will have had some financial problems and missed credit card or car payments will have a negative impact on their credit report. But, in the long run, if a loan modification puts you on the right track financially your credit score will begin to improve. Just make sure that you have a sound financial plan for your own recovery, such as using the savings on your mortgage loan to pay down other debts..

One potential problem in the federal housing relief plan is that your payments might be more. For example, if your home loan is still at a low introductory rate it isn’t out of the question that you may have an increased home payment after the adjustment. However, the up side is that you will avoid any interest rate spikes that are common with subprime adjustable-rate mortgages

Mortgage lenders who’re participating in the Making Home Affordable program are required to provide you with a “good faith estimate” which will include your new interest rate, monthly mortgage payment amount and the total cost of the loan. You should compare the numbers of the refinancing offer with your current loan to insure that it will be and improvement for you.

Another question is when should you apply for this mortgage loan adjustment. Mortgage rates right now are at historic lows and aren’t likely to go much lower but are more likely to rise later in 2009 and into 2010. It wouldn’t be a good idea to wait. Also the Making Home Affordable program expires on June 10, 2010 so you should bear that in mind as well.

As for the tax impact, any charges associated with refinancing a mortgage are currently tax deductible. However, some fees, such as an appraisal or home inspection, are not. Neither are certain attorney’s fees. Also, a lower interest rate will reduce your mortgage interest deduction so you may need to adjust your withholding to account for this change as well.

Should you not qualify for the federal loan modification program you can attempt to negotiate your own refinance or modification of your loan. Many lenders are willing to work with you to help avoid a costly foreclosure. I have mentioned in other articles on this site how to handle these negotiations.

Beware of third party home loan adjustment companies. While some are legitimate there are plenty of scammers out there. Some even operate using the federal loan modification as a cover by using official sounding names or invoking President Obama’s name. Don’t pay any upfront fees or fall for other scams like this. Remember that home loan assistance is always available for free from government approved housing counselors.

I hope this article has helped answer questions you might have about the new federal home loan modification plans.

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The main reason people are choosing to take this drastic step, in spite of having a good job with sufficient income to pay their mortgage, is that housing prices have fallen so far in some areas and may have little hope for recovery any time soon. People just can see continuing to invest money in an asset that no longer has the value they expected, even given the considerable negative effect strategic defaults have on a person’s credit score.

In the past, strategic defaults were rare. Generally, mortgage defaults were caused by a serious financial problem the borrower encountered, such as long term job loss or a medical crisis. Occasionally, there would be strategic defaults by people who had purchased a dangerously faulty home or who had another non-financial crisis but this was quite rare. In most cases, people were willing to tough out bad situations in order to save their home and credit. But, today, this may be changing.

Financial experts have long assumed that 99% of the time a homeowner would not chose to face the serious consequences of defaulting on a mortgage. They believed that borrowers would rather deal with problems associated with a home rather than having their credit ruined and never owning a home again. But, this attitude seems to be changing. Why?

In areas that have been hard hit by the housing crisis, such as California, home values have fallen an average of 45% from peak prices of 2005-2006. This would make a house that was worth $500,000 in 2006 worth about $275,000 in 2010. What’s worse, economists are predicting that home prices may not rise significantly for 10 to 12 years in certain hard hit areas. This economic climate makes strategic defaulting an attractive choice for many homeowners.

On paper, it makes sense to do a strategic default for people living in certain areas. Since home values are expected to remain low for so long, a homeowner could potentially lose thousands of dollars should the sell their home or simply lose the opportunity cost for thousands in mortgage payments. The classic argument against renting is that you’re thowing money away, but, when there’s not equity to be gained from owning real estate it makes this argument less compelling. With rents depressed as well, a strategic default could put $1000 or more a month in the former homeowner’s wallet, freeing them up to purchase things, pay off other debts or even save money.

Also, in the era of big bank bailouts and long distance commuter subdivisions there is less civic pride to serve as a psychological barrier to strategic defaults. People today tend to see mortgage lenders more as “Mr. Potter” than “George Bailey” and thus don’t feel bad about defaulting on a mortgage loan that they believe was taking advantage of them. Also, with people less connected to their neighbors, they’re less likely to feel badly about the consequences their strategic default might have on their neighbor’s home prices and the quality of their community in general.

The only barrier that remains is the tough financial punishment that defaulting on a home loan brings. The result is that the defaulting borrower won’t be able to borrow money for quite some time except at very high interest rates. With the consumer credit markets remaining tight, one who does a strategic default on a mortgage may find it impossible to get a loan at any reasonable interest rate.

What does it mean financially if you do strategically default?

Basically, it means that if you carry out a strategic default you’ll be living on a cash basis for many years to come. Any consumer products you want, you’ll pay cash for them. If you buy a car, you’ll have to pay cash for it. And you probably won’t be able to qualify for a home loan for at least 10 years, maybe longer depending on what happens in the credit markets.

The bottom line is that you’ll have to maintain a strict financial life after you default. This kind of frugal, disciplined, lifestyle may be difficult for someone who’s been on a credit binge for years. Operating your household on a strict cash basis doesn’t come naturally for many people but it is possible if you commit yourself to it. In fact, I recommend it even if you don’t plan to do a strategic default. You’ll find yourself in much better financial shape if you do.

Should you do a strategic default on your mortgage?

A lot of people are asking themselves this question since around 15 million homes have mortgages that are upside down and nearly 5 million mortgages are facing foreclosure or are behind 2 or more months. Some estimates calculate that about 1/4 of these troubled mortgages are held by someone who may be in or considering a strategic default.

Such a default isn’t easy. It requires some tough choices and tough lifestyle changes. It requires balancing your civic responsibility to your community against your own financial well-being. It means determining if your personal integrity means that you should keep your promise to the mortgage lender. It means preparing yourself and your family to shun credit and live on cash only. These are questions that you’ll need to consider before committing to a strategic default on a mortgage.

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The important thing is to remember that most homeowners wait too long to start investigating their options. It is almost as if they are looking for a reprieve from the lender.  Unfortunately, those in poor financial standing are unlikely to get that reprieve. Therefore, it is to your advantage to understand the facts of short sales ahead of time and begin negotiating with your mortgage lender as early as possible in the process.

Not all homeowners are able to receive assistance from their lender and not all banks are willing to offer it.  If you find yourself in this position, a pre-foreclosure sale at the full price of the mortgage may be the only way to keep your credit in good standing.  Don’t be mislead, a foreclosure will negatively impact your credit score for many years to come.  Some foreclosure lawyers advise their clients declare bankruptcy to stop foreclosure.  This can work in some states but it is also risky and will damage your credit score as well.

If you make the decision to sell your home, either at full price or at a price lower than what you owe (aka a short sale), it is a wise to make arrangements ahead of time with your lender. This is required in the case of a short sale but even if you manage to sell your home for you owe staying in touch with the mortgage lender will help smooth the process. If your lender knows that you are actively trying to sell your home they are more likely to allow you time to close that sale and may assist the sale in other ways. Staying in touch with the lender is something you should do.

As for that sale, it can be handled by you or by a realtor.  If you are upset about the loss of your home, working with a realtor who knows how to work with pre-foreclosure sales and short sales is advised.  Not only might you have difficulty dealing with prospective buyers who seem to have no regard for you or your troubles, you will also want to have someone who knows the process helping you out. If you do end up using the services of a local realtor who understands short sales to assist you with the sale of your home, you may actually receive more money.  This happens because realtors usually sell homes for somewhere at or around their actual assessment value.  Although it may be the case that not much will be left over after paying your mortgage and the realtor, it may be just enough to help you make new living arrangements. Since buying another home likely isn’t an option, you will most likely need to have enough money for a security deposit as well as first and last months rent.

Remember, buyers who’re interested in pre-foreclosure and short sales aren’t always careful with the words they choose.  Believe me, you may have to deal with people who look down on you. This can be an unpleasant situation, to be sure, but it is important to remain calm. Unfortunately, you will find that there are many misconceptions about people who’re facing foreclosure, most of which are not true.  Remember to always keep your head held high.  As painful as it may be to deal with a jerk, at least you can avoid foreclosure and keep your credit in good standing.

The biggest downside to selling your home, a home that you liked well enough to buy in the first place, through a pre-foreclosure or short sale, is the loss of your home. This stark reality is why many homeowners procrastinate until the last minute to begin looking into how to sell their home like this. It is a decision that many homeowners are uncertain and frightened about.  However, you have to know that unless you can get your mortgage back to good standing, you will lose your home regardless of what action or inaction you decide to take.  A pre-foreclosure sale or a short at least helps you retain a decent credit score, especially if your mortgage is paid off in full.

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