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OPTIONS TO NOT KEEP YOUR HOME:

HOW TO EXIT GRACEFULLY

The following summarizes the different ways to mitigate the consequences of
defaulting on your home loan. Even if you do not plan to keep your home, it is
important to study your options carefully, work with your servicer, and seek
advice from an attorney or housing counselor. Your choice will likely be based on
consideration of the following issues:

1. Your responsibility for the deficiency. If your home is worth less than what you owe on your
home loan(s), then there will likely be what is called a “deficiency” (i.e., the difference between
the balance of the loan and the amount obtained at a foreclosure sale or short sale). Some of the
options below may leave you responsible for the deficiency so that even though you no longer
own and live in the home, you will still be responsible for repaying a portion of the home loan.
Other options may relieve you of the responsibility to pay the deficiency.

2. The effect on your credit score. Being 30 or more days late on a mortgage payment will be a
significant hit to your credit score. Your credit score will take another big hit if you are ultimately
unable to pay back all of your loan and lose the home through a foreclosure, deed-in-lieu of
foreclosure, or short sale. The company that developed FICO scores, Fair Isaac, has said that
generally speaking each of these options (i.e., foreclosure, deed-in-lieu, or short sale) has roughly
the same effect on your credit score. Filing bankruptcy will have the most severe impact on your
credit score, though it may still be the best option for some people given other considerations.

3. Your liability for income taxes. The Internal Revenue Service (IRS) may treat cancelled or forgiven
debt as income on which you can be taxed. Please review the previous section of this publication
(page 31) entitled “IRS Debt Cancellation and the Mortgage Forgiveness Debt Relief Act.”

You should determine which of the following options makes the most sense for you.

Sell the property – This is the best option if you cannot afford the mortgage payment and if the house is
worth more than the amount owed. Other considerations include the condition of the home and how
much time you have. By selling your home before you fall behind on your payments, you will avoid
damage to your credit score, and you may be able to get more money out of your home than you would
with the other options described below.

Foreclosure – Allowing the home to go to foreclosure is sometimes the best option. Historically, nearly all
foreclosures were carried out through the courts (known as “judicial foreclosures”). Where the proceeds
from a foreclosure sale were insufficient to cover the balance of the home loan, borrowers would be
liable for the deficiency. In Washington judicial foreclosures have become less common. Most
foreclosures now take place through a “non-judicial” process that does not involve the courts. If your
servicer is conducting a non-judicial foreclosure, after the foreclosure you will no longer be responsible
for the deficiency. However, if you have a second mortgage on your home, only the first mortgage, which
foreclosed, will be discharged and you will remain responsible for any deficiency on the subordinate or
junior loans.

January 2020 | Page 51