When you come to the conclusion that you cannot afford your mortgage, you must make a tough decision -- how to get rid of your home. You might think that the mortgage you signed must be repaid in accordance with the anticipated schedule, but you can probably sell the home and satisfy the mortgage in one lump sum. However, check with your bank, because your mortgage note might charge a penalty for early payments. In some cases, the mortgage contract may make it impossible to sell a home without prior approval.
You can sell your home if you owe money on your mortgage at any time. However, your contract may charge a prepayment penalty. Mortgages providers commonly require borrowers to pay a penalty for repaying the mortgage within three to five years of selling the property. This penalty usually equals 2 to 3 percent of three to five years of regular payments, according to The Mortgage Professor's Web Site. After five years, this penalty usually expires. Another big concern is how the bank views the deed transfer. Some banks require borrowers to receive approval before selling or transferring a home. If the bank finds out about an unauthorized home sale, it might foreclose on the property within weeks.
If You Cannot Repay Your Mortgage
In 2010, nearly 25 percent of homes were worth less than the mortgage attached to the property -- referred to as "under water," according to Aaron Hirschorn of RealEstate.com. Thus, you should prepare yourself for a situation in which you may not be able to repay your loan with the proceeds from a home sale. Even if you let the bank foreclose on your home, you might owe any remaining balance unless you live in a state that cancels deficiency balances -- called a non-recourse state.
You can "sell" your home to your bank and avoid foreclosure costs. The two most common methods to return a property to a bank are short sale and deed in lieu of foreclosure. In a short sale, you and the bank agree to let you sell the home for less than you owe as long as you receive a minimum offer, and then the bank forgives the deficiency balance. A deed in lieu of foreclosure usually takes less time than a short sale, because you give the bank the deed to the home. In both cases, you damage your credit score, which makes it harder to acquire a mortgage in the future.
You may need to consult a mortgage expert to help set the right course for your mortgage. Your bank might offer loan modification, such as delayed payments or forbearance, to keep you in your home. If you decide you must get rid of your home and opt for a short sale or deed in lieu, you probably won't pay tax on any debt forgiven as long as you sell the home before the Mortgage Forgiveness Debt Relief Act and Debt Cancellation exclusion expires in 2012.