By Sally Heriqstad
MSN Money

Steve and Debbie Martin are losing their home. That’s for sure.
The only question is whether it will be in a short sale or a foreclosure. They’ve
found a buyer, who is offering less than what they owe. The Martins just have to
get the bank to accept the offer.

In the past, that’s been a tall order. Since the housing meltdown began, shortsale
offers have often taken months to get a response from overwhelmed
lenders. Even then, there have been no clear guidelines about what kinds of
offers are acceptable or about how to handle second mortgages that could easily
derail the process.

Industry experts estimate that less than half of short-sale offers have been
accepted, and many real-estate agents have avoided showing these properties
altogether. Ultimately, most of the homes go into foreclosure.

But if the Martins can hold on until April, a new federal program might help.

Starting April 5, lenders in the Home Affordable Modification Program must offer
borrowers the option of a short sale, including the minimum amount needed for
an acceptable offer, if their mortgage doesn’t qualify for a modification.

Once a homeowner applies to list his home as a short sale, lenders must
respond to offers within 10 days. The program also offers $1,500 to homeowners
to help them move, $1,000 to loan servicers to cover the cost of paperwork and
up to $3,000 in incentives to secondary lenders who might otherwise reject an
offer.

How you lose your home matters

The Martins bought their home in 2003, when they needed a larger house for
themselves, their three grown children and one grandchild. Steve and Debbie
made the down payment, and all five adults signed on the loan. Everyone
chipped in on the mortgage payments.

The Martins figured that when their kids moved away, they would sell the house
and all would share the profits. Then property values in the Pacific Northwest
plummeted. As the nest emptied, Steve and Debbie started having trouble paying
the mortgage.

Now the Martins can no longer sell the house even for the amount they owe on it.
But they don’t want to just walk away. They feel a moral obligation to try to pay
back their loan, and they don’t want to trash their and their children’s credit
scores.

The Martins tried everything before asking the bank to accept a short sale. Steve
started taking one of his pensions early in an effort to make ends meet, but it
wasn’t enough.

“We tried to refinance,” he said. “We tried that with three institutions, and they all
said no because there were too many people on the mortgage. We tried loan
modification and had the same issue.”

Millions of people like the Martins are finding it hard to hang on to their homes as
the Great Recession squeezes both household income and housing values. And
many others who owe a lot more than their houses are worth may just want out.
Walking away, however, is a terrible choice — one you could regret for years.
Here’s why:

You could get hit with a deficiency judgment. It’s common to assume that if you
walk away from your home, the bank can’t come after you for more money,
because the loan was attached to the house.

But that’s not always true. In some states, lenders can obtain a deficiency
judgment for the difference between what you owed and what they got from
selling your house.

Florida is one of those states. “No homeowner should walk away,” says Rashmi
Airan-Pace, a Florida attorney who specializes in mortgage modifications and
foreclosure defense. “Deficiency judgments are very damaging.”
Airan-Pace points out that lenders, for example, can seek to garnish wages or
place liens on other properties.

Other states, including California and Arizona, are nonrecourse states, which
means that laws there prohibit such judgments. You still have to be careful,
though; some lenders get borrowers to sign papers obligating them to pay
deficiencies anyway.

Foreclosure can ruin your credit scores for up to 10 years.
When it comes to the effect on your credit scores, having a few late bills is to foreclosure what
having a leaky faucet is to burning down the house.

“When a foreclosure is filed against a property owner, that person’s credit will go
down 100 points,” Airan-Pace says. “At the foreclosure sale, it goes down
another 100.”

She estimates that a short sale would do about one-quarter as much damage to
your scores. And though you can start pulling up your credit scores substantially
from a short sale or a spate of late payments within a couple of years, a
foreclosure can affect your credit history for a decade.

First, do all you can to keep the house
Before you think about letting your home go, make sure you’ve exhausted every
other possibility.

If you can save your home by working extra hours, staying on a strict budget or
taking money out of savings, you should consider it. (In general, don’t touch your
retirement accounts, however.) If you just want out because the value is down,
remember that a house is still a place to live, regardless of what the market says
it’s worth.

You would also be wise to consult a credit counseling organization, such as the
National Foundation for Credit Counseling, or hire an attorney. According to the
nonpartisan Urban Institute, borrowers facing foreclosure are 60% more likely to
hold on to their homes if they receive counseling.

When you hit trouble, the first step is to see whether you qualify for federal
programs that help you refinance your home at a lower rate or reduce your
mortgage balance. Be patient. And be prepared for lots of paperwork. The
Martins say they have faxed more than 80 pages at a time to their lender.
Sam Hussain of ClearPoint Credit Counseling Solutions in Modesto, Calif., says
that people often get frustrated when they have to fax the same paperwork more
than once. “That’s reality,” he says. “Ask for the mailing address, and use
certified mail.”

Hussain also recommends you use a notebook to make a conversation log
through the process. Write down the name of every person you talk to, the date
you spoke and what was said.

It should go without saying that getting your legal advice from scam outfits that
advertise in spam e-mails or on utility poles is a bad strategy. As Lee Jones, a
spokesman for the Department of Housing and Urban Development in the
Northwest, says: “They fold up in the night like a lawn chair and take your money
with them.”

It’s also good practice to steer clear of well-intentioned people who are out of
their field. Taking advice from friends, relatives and even your real-estate agent
can be a costly mistake.

A credit counselor or attorney can be helpful if saving your home proves
impossible and you seek to complete a short sale or deed in lieu of foreclosure.
Keep in mind that banks will want to know that you tried every other avenue first.

How to get help losing your home the right way

A new federal program, Home Affordable Foreclosure Alternatives, encourages
banks to accept short sales by offering them financial incentives to do so. It offers
sellers incentives, too.

Homeowners win because:
• They won’t get stuck with a deficiency judgment. Under the program,
homeowners are released from all obligations.
• They can receive $3,000 in relocation expenses.
• They can’t be charged any fees to participate.

Creditors win, too, because they don’t inherit a vacant home to maintain. As big
as the losses in short sales can be, the losses from foreclosure can be even
bigger — by some estimates, as much as 60% of what’s owed on the mortgage.
Secondary lenders, who often stand to get nothing in foreclosures, can receive
up to $6,000.

You may qualify for the foreclosure-alternatives program if:
• You have tried unsuccessfully to get a mortgage modification through the
Home Affordable Modification Program.
• The property is your principal residence.
• You got your first mortgage loan before Jan.1, 2009, and it is guaranteed
by Fannie Mae or Freddie Mac.
• You are behind on your mortgage or will be in the foreseeable future.
• You owe no more than $729,750.
• Your total monthly mortgage payment is more than 31% of your income
before taxes.

The foreclosure-alternatives program is set to expire Dec. 31, 2012. Some critics
predict that it will be as disappointing as the loan-modification program, which
was launched in March 2009. Out of millions of distressed homeowners, just
170,000 had received permanent modifications as of the end of February,
according to the Department of the Treasury and HUD. (Many more
modifications are being offered or are in the trial phases.) The median decline in
monthly mortgage payment was about $500.

Will the new program be any better?

“It’s half right,” says Mary Tootikian, the author of “Stunned in America: Sub-
Crime Mortgage Crisis.” “The intent of it is good.”

She worries, however, that the new program’s application process will allow
lenders to find out borrowers’ incomes and assets. “After they go through this
fact-finding mission and they find out you have assets to go after, they don’t have
to let you do a short sale,” she says.

Arian-Pace, the Florida attorney, is more optimistic. “The frustration of short sales
is the timing of it all, getting banks to approve it,” she says. “You often lose the
buyer in the process. I’m hoping it’s a step in the right direction. Really, it’s going
to come down to how the banks implement it.”