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David Monroe

Should You Stop Making Your Mortgage Payments?

House Under WaterAs short sales are becoming more common, I’m finding that a higher percentage of people who contact me regarding a short sale are still current on their mortgage(s).  Many of them have just made the last mortgage payment that they can afford to make, while others are trying to develop a strategy that will produce the best results for their situation.

While I typically recommend paying for basic necessities like food, shelter, utilities, clothing, and basic transportation first, sometimes it’s just not possible to continue paying a mortgage payment that is well above an affordable level.  While I cannot advise anyone on whether or not they should stop making their mortgage payments, here are ten things to consider:
  1. If your mortgage is FHA insured, you’ll typically need to be at least 31 days behind on your mortgage before they’ll consider a short sale.

  2. For other types of loans, some lenders will approve a short sale if your payments are current, and some will not.  It depends on the underlying investor, and some banks service loans for many different investors.

  3. The short sale process may take longer if you’re current on your mortgage payments.  The bank usually won’t feel that there’s a risk of getting the house back if you’re current on your payments, so they may not be as motivated to work on a reasonable timeline.  A good real estate agent with short sale experience may be able to assist you with the wording in a hardship letter so the bank understands that even though your mortgage is current now, default is imminent.

  4. If you stop making your mortgage payments, it will have a negative effect on your credit.  Therefore, you should make sure you handle anything that would be impacted by negative credit before you stop making payments--And that doesn't mean going out and buying a new car or furniture on credit then not make your mortgage payment.  Securing a place to rent could be impacted by negative credit, but this is usually done much later, and you may be able to explain the circumstances to a prospective landlord.

  5. If you have significant liquid assets (cash in the bank, CDs, whole life insurance policies, or other investments), the bank may require you to put up some cash at closing or sign a promissory note as a condition of approving a short sale, regardless of your mortgage payment status.  IRAs and other retirement plans are typically exempt, but that won’t necessarily stop the bank from trying to ask for these funds.  I’ve heard of situations where sellers were tricked into borrowing from their IRAs to pay back mortgage payments or cover deficiencies on a short sale.

  6. If you stop making your mortgage payments, the bank will attempt to collect the back payments.  If you have two mortgages, the second mortgage lender will probably harass you much more than the first mortgage lender will.  The second mortgage lender is also much more likely to use unscrupulous and unethical collection tactics.  Be prepared.  It’s a lot easier to deal with if you know what to expect.

  7. If you have a second mortgage and stop making your mortgage payments, the second mortgage lender may tell you that they won’t approve a short sale if the second mortgage is delinquent.  This is a collection tactic and is not true.  In fact, the exact opposite is often the case.

  8. Borrowing from a credit card to make your mortgage payment is not recommended.  I have yet to come across a situation where this actually ended with a positive outcome.

  9. If you stop making your mortgage payments, it could eventually lead to foreclosure if you are not able work out something with the bank or have a short sale approved.

  10. If the bank determines that you have enough income to make the mortgage payments, they may not approve a loan modification or a short sale.  However, the bank may make an exception in special circumstances like divorce or an out of area job transfer, where staying in the house may not be an option.

If you also have credit card debt, here are some things to keep in mind:

  • Credit CardsIf you’re unable to continue making your mortgage payments and intend to do a short sale, staying current on other debt outside your mortgage (car payments, credit cards, etc.) will typically make it easier to secure a place to rent after the short sale is complete.  It will show a prospective landlord that although you had stopped making your mortgage payments because the payments were more than you could afford, you are able to make lower rent payments, and the mortgage situation was an isolated incident.  Many people in short sale situations would have sold their house before they fell behind on their mortgage payments if they would have been able to sell their house for enough to pay off their mortgage.

  • Some banks may check your credit before approving a short sale.  If they find out that you stopped making your mortgage payments but have stayed current on your credit card payments, they may reject the short sale offer.  I’ve only heard of this happening once, and it was with Bank of America.  It’s unclear whether it was just a threat or if the underlying investor actually required that.  However, consider this a warning—It could happen.
Make sure you understand the foreclosure timelines.  See my blog post, Foreclosure Process and Timelines in Washington State for timelines in Washington State.

In the end, the decision is up to you.  There may be risks and consequences regardless of your decision.  Just make sure you have all the facts so you’re making an educated decision.
Published Thursday, April 8, 2010 12:58 PM by David Monroe
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