What to do if your mortgage payments fall behind
Julie Garton-Good, GRI, DREI

Statistics from a recent Mortgage Bankers Association survey show that not only are more Americans having trouble making their monthly mortgage payments, but the number of loan defaults is growing as well. Problems cited include underemployment, divorce and heavy consumer debt.

If you ever find yourself in a position where making your house payment becomes difficult, there are steps you can take to work things out--but it's imperative that you not delay taking action.

First, call your lender to discuss the situation. Be honest about the circumstances. Most lenders are willing to work with you on alternatives if you're upfront with them. This is especially true if the problems are caused by something outside of your control (such as job loss, illness, etc.). Some short-term solutions could include paying interest-only payments, making partial payments or adding payments onto the back of the loan.

If an alternative arrangement can't be worked out with the lender, try to catch up as soon as you can. This could mean taking on a second job, a weekend job or selling some personal property to liquidate your assets.

What if you just can't get the payments current? You might be tempted to "mail the keys" to the lender. But don't do this without knowing all of the consequences. The lender does not have to accept the property back from you. In fact, depending on how your mortgage loan is written, the lender could actually sue you for any shortfall the property doesn't bring at the lender's sale.

Make sure you get answers to the following questions:

If the lender does take the property back, will they agree not to post it on your credit report? This is one point often negotiated with the lender. After all, you did walk away from the equity.

What will the income tax consequences be in giving the property back? There's a potential that the forgiven debt (the loan you're walking away from) could be taxable as ordinary income. Talk about adding insult to injury. You might lose the property and still have to pay federal income tax on the forgiven debt. Be sure to check with your tax advisor before taking any action.

Giving the property back could be seen by subsequent lenders in the same light as a foreclosure. Even though it's a voluntary action, it can have a negative implication for your credit. Getting behind in mortgage payments is never painless. But make sure you get the advice you need. Explore all of the alternatives before bailing out of the property, because that could mar your future financial picture.