Given the current climate of the housing market in New Jersey many homeowners are finding themselves with mortgages far greater than the current fair market value of their property. Many of these homeowners are unable to get out from under the water and soon find themselves facing the very real possibility of foreclosure once they begin to fall behind on these mortgage payments. At the conclusion of the New Jersey foreclosure process the homeowner’s property is sold at sheriff sale. With the mortgage exceeding the value of the property there is a strong possibility that the sale will not satisfy the mortgage amount and the homeowner will become liable for a deficiency judgment, the remaining unpaid balance of the mortgage debt.
In combating this, a homeowner who is not interested in staying in the underwater home may utilize two options to avoid the potential deficiency judgment altogether. He may seek a deed in lieu of foreclosure or attempt a short sale. In attempting a deed in lieu the homeowner makes an agreement with the mortgage company to turn over the property in exchange for cancelling the loan. However the probability of utilizing this avenue will become more difficult as the number of mortgages on the property increases. In utilizing a short sale the homeowner essentially obtains permission from the lender to sell the property for an amount that falls below the amount of the loan. Depending on the jurisdiction the homeowner resides in, the short sale may foreclose the possibility of a deficiency judgment if agreed upon by the lender. While both of these methods may be appealing, each comes with several drawbacks. Completing a short sale or deed in lieu could have an adverse impact on the homeowner’s credit report and could also create adverse tax consequences, requiring the homeowner to include in his income the amount of forgiven debt. Ultimately the best method to proceed under may vary on a case by case basis.