Nov 28, 2011

Q: We just got multiple offers on my vacation house listed as a short sale. And so far, we have begged and borrowed to keep our mortgage current so our credit scores will be less bruised. But now that our house is in contract, do I continue to pay the mortgage? Our debt exceeds our income due to job and benefit loss.

Heres my bigger concern: Since we are current, I dont want the bank to reject the offers just because we have been current, although our financial papers will prove that our debt exceeds our income. Cindy

A: There are a number of schools of thought and approaches to deciding whether to continue making your mortgage payments while youre selling your home on a short sale, and your ultimate decision will require you to weigh a number of factors and see where your personal calculus of your own values and interests comes out:

Legal. Legally speaking, you have an obligation to pay your mortgage and property taxes as long as you own your home. While you might very well make the decision not to for a number of reasons (see below), its important to keep the legal contract you made to pay especially your mortgage in mind, as some lenders make efforts to reserve the right to come after you later for the deficiency (i.e. the difference between the sale price of your home and your mortgage balance). For this reason, its not a bad idea to have a local real estate attorney involved in your short-sale transaction, to help you negotiate a complete release of liability for the mortgage.

The moral/ethical perspective. Morally and ethically, some homeowners view themselves as having an obligation in line with their legal commitment to pay all these items. Others look at the various factors beyond their control that have forced them to short-sale their home, like the decline in property values and the weak employment market, and have made a decision that their personal moral imperative weighs in favor of protecting their family finances and childrens education funds. In that vein, some make the conscious decision to stop paying once theyre in a short-sale situation or on a clear path to foreclosure.

Financial/business. Once you know 100 percent that youll be divesting of your home in some way, shape or form, continued investments in the property can seem to easily fall into the throwing good money after bad bucket, looking at the situation from a strictly business and financial perspective. There is also a strong sentiment among many real estate professionals that if you keep your mortgage current, while applying for a short sale or loan modification of any sort, you decrease the chances that your lender will approve of the sale.

The theory goes that if you are current on your payments, you cant possibly have the level of hardship you must claim (and the lender must believe you have) for them to agree to waive the deficiency amount and release you from the mortgage.

Ive seen very mixed feelings on this in the real estate industry; on this point specifically, you should definitely talk with your listing agent and your local attorney, and take their advice into account they might have worked with this bank in the past and be able to shed light on how staying current or falling behind may affect the success prospects of your short sale application.

Credit/ability to buy again. Right now, you are probably fixated on getting out from under this onerous debt, as virtually every homeowner in your situation is as a matter of course. But Ive worked with a number of folks through this entire experience of going upside down, losing a home through a foreclosure or short sale and financial recovery, and I know that before too terribly long, you could very well be looking to buy a home again. Just be aware that most lenders will impose a two- to three-year waiting period after you have a short sale, if you were in default on your mortgage at the time the short sale closed (sometimes the waiting period is as long as seven years, depending on what type of loan youre trying to use to buy your new home).

However, if you do not default on your loan and are able to get your lender to green-light your short sale, you can qualify for an FHA mortgage immediately. I dont know your personal situation, and its been my experience that the majority of homeowners who have a financial hardship severe enough to even attempt a short sale need a couple of years to get back on their feet, but if you think youll want to buy another home anytime sooner than two years from now, youll need to stay current on this mortgage.

Just as there are many factors your bank will weigh in determining whether to allow your short sale to close, and on what terms, you have a lot of considerations to weigh in deciding whether to continue making your mortgage payments while you await their decision. I cant urge you strongly enough to include your real estate agent and an attorney in your decision-making process.

Tara-Nicholle Nelson is author of The Savvy Womans Homebuying Handbook and Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions. Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com .

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