In states like Florida, this can be big numbers.  Say you had a house with a mortgage of $500,000 but now that the market has gone south it’s only worth $250,000.  When the bank forecloses and sells your home, they can come after you for the remaining $250,000.

In places where the market value has plunged off a cliff, some homeowners are walking away and letting banks take back their homes.  But in states that allow deficiency judgments, banks may start playing hardball.  Deficiency judgments vary by state, so always seek legal counsel in making your decisions.

Here is a link to a website outlining Missouri foreclosures.

Here is a link to a website outlining Kansas foreclosures.

photo credit: Aaron Gustafson

The tax credit clock is ticking for buyers.  To qualify, you will have to have a contract by the end of April 2010 & close by the end of June.  But I just read that the IRS just “clarified” the qualifications.  They said that a binding contract must be signed by all parties that need to authorize the sale. In the case of a short sale this could mean that even now it is too late.

Some lenders move to approve short sales at the speed of a dial-up modem.  A signed agreement today might take well past the end of April to be approved for a short sale.  You can read more on this subject by clicking HERE.

If you are looking to cash in on the tax credit, work with a realtor who can advise you on the realities of the market and get your home closed in a timely manner.

Disclaimer:  I’m not an attorney or tax adviser so these comments are not to be taken as legal or tax advice.

photo credit: fPat

Some lenders are starting to write down the principal for some homeowners in trouble, according to a story in this weeks edition of Business Week.  Mortgage work-out solutions in the past have just addressed the interest side of loans, giving very little to homeowners who now owe significantly more than the present market value of their home.

Banks can either forgive part of the principal or merely defer it.  If principal is deferred, the homeowner must pay back the full amount of the loan when he sells the house.  If the house doesn’t sell for enough to cover the balance, the homeowner has to pay the difference.  Such a solution may just push the problem down the road for many people.

It is still rare for banks to forgive or defer principal.  But in the 3rd quarter of 2009, 3% of the total mortgages that were modified included principal modification–either reduction or deferral.

The writers of this article didn’t mention the effect of mortgage write-downs on the homeowner’s credit.  It is likely such a new concept that the rules of the game have yet to be established.  I will venture a guess, however, that the effect will be similar to that of a short-sale: that is, it will not be the train wreck that foreclosure can be.  But it will have a significant impact on the credit score.

“If you have to eat a live toad, don’t look at it too long.  If you have to eat several live toads, eat the biggest one first.”

I think this may be a good way to look at short sales verses foreclosure when it comes to the effect on your credit.  In general neither are pleasant, but foreclosure tends to have more of a negative effect on your credit score than a short sale.

With so many people underwater on their mortgages, banks are sometimes willing to do a short sale even if the mortgage is current.  For some homeowners it may be the only way to salvage some of their credit.  But it isn’t a painless process.  For a more thorough analysis of how short sales and foreclosures affect your credit, click here for an excellent article by Elizabeth Weintraub.