Recently, I read that 47% of mortgages in the City of New Haven are "underwater", which means that the home is worth less than the amount of the mortgage on it. If you can afford the monthly payments, and you are not planning to move, that may not be an issue. However, for those who cannot pay, it's important to understand that there are ways to handle the situation that are better than others.
A "short sale" is one where the sellers cannot pay off the mortgage or mortgages and liens with the proceeds of the sale. In some cases, they are able to bring money to the closing and settle the difference. In many cases, however, they cannot afford to do so. It's almost always better to tell the bank earlier rather than later. Many banks are currently offering "forbearance periods", where they are suspending foreclosure actions. When those periods expire, they will have to decide whether or not to foreclose on delinquent borrowers.
Generally, if you have the ability to pay in full with other assets, the bank will expect you to do so. If you have no ability to pay, they will usually foreclose. If you fall in the middle, and it will be a short sale, they can work with you (if you can find someone to whom you can speak) to make the process as bearable as possible. You can also give permission for your Realtor or your attorney to speak to the bank about your property. In some cases, you may be offered money to move out. In others, the bank may offer to pay the closing expenses and/or the shortfall. Their position may have more to do with the amount they are carrying on their books for your mortgage repayment (in other words, if you are delinquent they may already have written down the value of the loan on their books) and their particular capital situation than with your circumstances. If you cooperate and are reasonable, you may even be able to negotiate to some extent about how your transaction will appear on your credit record. Like many things in life, it's an art and not a science.
