What if you owe more than your home is worth in Pa.?

Don't panic because there are options such as filing for foreclosure, a deed in lieu of foreclosure, forbearance, short sale, or mortgage modification.

Each option will affect your credit, budget, and most likely taxes.

Many lenders will work with Pennsylvania homeowners even if the property is worth less than the purchase price. You don't need to wait until your mortgage is in arrears to negotiate more manageable payments. All the options below require negotiations. You will be negotiating with banking and lending experts. Hire a real estate lawyer to negotiate with the experts on your behalf.

Foreclosure is a scary word.

What happens? The bank files a lawsuit against a homeowner who defaults on a mortgage. Banks normally obtain a summary judgment foreclosing on the house, which results in a public auction by the county's clerk of court. In some cases, defenses are available that can lead to the need for a trial. The sale can be perceived as income by the IRS if the bank issues a 1099 for the difference between the home value and the outstanding debt. This needs to be negotiated with the lender.

Your credit is tarnished for about ten years.

Deed in lieu of foreclose

For a deed in lieu of foreclosure, the owner and lender negotiate for the bank to accept a deed from the homeowner to avoid the foreclosure of the home. The bank might require the owner to sign a promissory note for the balance of the loan to be repaid, which is the loan balance minus home value. In some cases, the homeowner must prove that he tried selling the home through a real estate agent and failed to find a buyer.

The owner loses the house to the debtor and walks away from future payments. It's not a good remedy if you are living in the home and has no place to go. The transaction can be perceived as income if the bank issues a 1099 for the difference between the home value and the outstanding debt.

As for your credit report, a deed in lieu of foreclosure is better than a straight foreclosure because it shows that the mortgage was settled. However, it's also damaging because the late payments on the primary residence will be shown on the report. The number of late payments preceding the deed and the way the bank reports it are included on a credit report for seven years.

Mortgage / loan modification

For a mortgage or loan modification or loan mitigation, you can negotiate directly with the mortgage holder or bank to lower the principle balance or reduce the interest rate of the property. You get to keep the house and keep paying reformulated terms of a mortgage. To the IRS, it might result in income to the buyer.

As for your credit, it depends on the number of delinquent payments prior to the deal and how the bank reports it. Those delinquent payments will be on a credit report for seven years. If no late payments are made, it will have no effect on a credit report.

Forbearance

With a forbearance agreement, you negotiate directly with the mortgage holder or bank for better or more manageable payment terms. Forbearance can mean changes to an interest rate and amortization, meaning the mortgage is extended to 35 or 40 years instead of 30. The bank may also tack on the late or missed payments and fees on top on your monthly mortgage for a few years. You get to keep your house and keep paying reformulated terms of the mortgage. The IRS may see this as income in your pocket.

As for your credit, it depends on the number of delinquent payments prior to the deal and how the bank reports it. If payment is behind, it can be reported on credit for seven years.

Short sale

In a short sale, the owner enters into a contract with a buyer for less than the debt secured by the property. The lender must agree to release the property of its lien for an amount less than the sale amount of the current sale proceeds. A normal closing takes place with some requirements to protect the parties during closing.

The home is sold and the owner has no loan obligations. The bank will sometimes require the borrower to sign a note for the difference between the loan balance and sale price. It can lead to income according to the IRS if the bank issues a 1099 for the difference between the home value and the outstanding debt.

As for your credit, it depends on the number of delinquent payments prior to the deal and how the bank reports it. If no late payments are made, the mortgage shows settled in a credit report.

All the above options require complex negotiations. You might think that you're capable of doing it and maybe you are but the vast majority of people who are already stressed out will fail at their best interests. You will be negotiating with experts. Shouldn't you have a real estate lawyer by your side?