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Q: I bought some property at the peak of the market. I got a loan based upon stated income and no documentation. I might have claimed more income than I really made. The property has gone down in value and I am having trouble making the mortgage payment. I am just about out of funds. I now have a buyer who is interested, but is offering less than the mortgage I have. I do not have enough money to pay the difference to the lender. What can I do?

A: Your possible sale is what is known as a short sale. In a short sale, the mortgage lender approves the sale and agrees to take less than full amount of the mortgage to satisfy your debt.

Over the past few years, a number of factors have combined to increase the number of property owners in your position. As real estate prices increased, lenders brought out adjustable rate mortgages with low initial interest rates and programs where income verification documentation was not required. These efforts were designed to help buyers purchase property who might not qualify under conventional financing.

In your case, they appear to have also encouraged you to “fudge” your qualification. For purposes of this article, we will not address the possible criminal ramification of a false loan application.

New loan opportunities and the speculative fervor surrounding the real estate market throughout the country led to a rapid increase in pricing and created an unsustainable situation. Where buyers used to apply 25 to 40 percent of their income to pay mortgages, in many cases the buyers from 2003 through 2006 are paying 60 to as much as 80 percent of their income toward mortgages. When investment fervor cooled and prices declined, many of these owners were placed in your position.

In some cases, market value declined below mortgage balance. When that is combined with an owner depleting available funds to continue mortgage payments, it leaves the owner limited choices.

An owner in your position can consider bankruptcy. Needless to say, that is a draconian remedy that should be considered as a last resort. Moreover, recent amendments to the bankruptcy code require review of the bankrupt’s possible ability to pay debts over a payout term, which can make things rather complicated.

You can quit making payments and see what the lender does. Most will file suit for foreclosure. At end of suit, if the property does not sell at the foreclosure for enough to pay off the mortgage, lender may seek a deficiency judgment against you. That means, you are not done with the property or debt, even after foreclosure and the lender might get a judgment against you personally for shortage in payoff, including costs of the foreclosure.

You can offer the lender the deed in lieu of foreclosure. Few will be interested, as lenders are not in the business of buying and selling property.

A final option is to negotiate with the lender to accept less than full payoff as part of sale to a third party. Many lenders will consider this option under the current market conditions. Such lenders recognize that a foreclosure sale will likely bring even less money than a sale at reasonable market price and where the debtor has little or no other assets, there is not much else to get by playing hardball.

If you want to pursue a short sale, you should contact your lender as soon as possible. It is better to contact the lender before your loan is in default. Once your loan is placed into the delinquent category, you may find yourself dealing with the bill collector arm of the lender. These personnel may be less likely to negotiate what is in the lender’s best interest as their primary responsibility is to pursue collection to foreclosure.

Your lender will want to see other information. Property value is important, so it is a good idea to get an appraisal by a certified appraiser.

The lender will have access to you credit history, but not necessarily a current financial statement. Remember, the lender is looking to see if a collection action will benefit the lender, or will, instead, be merely additional expense.

Lastly, you need to find a buyer. It can take weeks to get approval for a short sale. So you either need to find a buyer with the patience to wait for your negotiations to conclude (knowing that you may be unsuccessful) or you need to get approval for sale at a reduced price from the lender before you actually sell to a buyer. The latter course will allow you to aggressively market the property at a competitive price.

You should retain three professionals to assist you in your efforts. First, hire an experienced attorney to assist with lender negotiation and provide advice concerning the legal ramifications of all steps. Second, you should retain a qualified Realtor. The Realtor can assist in marketing and determining market value for your property. The Realtor can also talk to the lender about market conditions. You should also involve your CPA. The CPA can assist in preparing financial documents that will be easily understood by the lender and confirm other financial information that may be requested.

Keep in mind that if you have not been completely honest in your application, that may expose you to other liability, but that is a topic for discussion with your attorney.

If you are overextended on a property that has decreased in value, prompt action is in your best interest. I suggest you put together the professional team outlined above, coordinate an approach to your lender and offer a realistic assessment of the situation to avoid bankruptcy or foreclosure litigation.

S

William G. Morris is an attorney with offices at 247 North Collier Boulevard on Marco Island, Florida. His practice covers a broad range of subjects, including civil litigation, real estate, business and corporate law, estate planning and probate, domestic relations and contracts. He writes this column periodically with respect to legal matters that frequently affect non-lawyers. The information contained in this column is not intended as legal advice and, of necessity, is generalized. For questions about specific circumstances, the reader should consult a qualified attorney.

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William G. Morris is a lawyer with offices at 247 N. Collier Blvd., Marco Island. The column is not intended to be legal advice for specific circumstances. General questions can be sent by e-mail to wgmorrislaw@earthlink.net or by fax to (239) 642-0722. Read other columns at http://www.wgmorris.com.