Strategic default of home might cause legal issues

Q: For homeowners to list their home for a short sale, do they have to prove hardship for not being able to make their mortgage payments?

If homeowners are in a good financial situation and can afford to pay their mortgage, can they just stop making their mortgage payments simply because they are upside down, then turn around and seek a short sale?

A: This has become an increasingly hot topic, especially because short sales are approaching record levels in Southern Nevada. A short sale occurs when a lender agrees to release its lien on a home so it can be sold for less than what the borrower owes on the mortgage. The borrower may still owe the extra amount, unless the lender agrees to forgive the difference.

I would strongly suggest you consult with a qualified attorney and possibly also a financial adviser because every person's situation is unique, and there are legal issues involved.

If you are in a position where you owe more on your mortgage than your home is worth and have to sell your home and move, you really have two options. One option would be to seek a short sale. The other choice would be to pay off your existing mortgage.

I can tell you from experience that if a lender finds that a homeowner has the means to repay their mortgage loan, the lender is generally less likely to forgive the deficiency that goes along with a short sale.

Of course, every lender is different. The scenarios are many. 

If you default on your mortgage, you risk your credit being damaged for years to come. Some mortgage professionals and other experts have told me this credit hit can linger for at least two to four years. 

This also brings up the issue of walking away from your mortgage. As home values dropped in recent years, we have seen many distressed homeowners and investors just walk away from their properties. This is often called a strategic default.

Such homeowners often come to the conclusion that the negatives on the property far outweigh the positives.

After speaking with your attorney or financial adviser, you can call your lender and see what your options are. 

The good news is that several new programs have been introduced to help distressed homeowners stay in their home, lower their monthly mortgage payments or at least leave their home via a short sale instead of losing their home to foreclosure.

Finally, I feel compelled to remind anyone considering a short sale to do all they can to sell their home by the end of this year. The Mortgage Forgiveness Debt Relief Act of 2007 is set to expire Dec. 31, unless President Barack Obama and Congress act to extend it. 

That means after Dec. 31, whatever amount of money the bank writes off in agreeing to sell a home as part of a short sale will become taxable income when the seller pays his or her federal income taxes.

That also applies to debt reduced for borrowers who lose their home in a foreclosure or who benefit from a mortgage loan modification.

Real estate agents are urging Congress and government leaders to extend that mortgage relief act.

Kolleen Kelley is the 2012 president of the Greater Las Vegas Association of Realtors. To ask her a question, email her at ask@glvar.org. For more information, visit www.lasvegasrealtor.com.