Fighting to Keep the Roof

Instead, the borrower may be able to arrange a "short sale." With the mortgage holder's permission, a borrower can sell a home for less than the amount due on the loan and turn over the proceeds to the lender.

If the lender has reason to believe it can extract more value from the house, possibly by negotiating lower commissions from the agent involved, it may ask the homeowner to give it the deed of the house, surrender ownership rights and leave the property. This transaction is called a "deed in lieu of foreclosure."

To entice homeowners to leave quickly, some firms might even offer "cash for keys" -- a small sum of money that can help defray moving costs.

For lenders, all these deals typically reduce the cost of taking possession of the house.

In return, borrowers can shed their loan obligations, spare themselves the humiliation of a public foreclosure notice and protect their credit record. A short sale and a deed in lieu of foreclosure are far less damaging to a consumer's credit than an outright foreclosure.

But pay attention, says Richard Gottlieb, a consumer financial services attorney at Dykema Gossett. "A lender has every right to proceed against a borrower for the balance due on the mortgage loan," he said. "A borrower with significant assets is still at risk."

As a practical matter, most lenders will accept whatever money they get from a short sale or a deed in lieu of foreclosure, but borrowers need to make sure when they walk away that they are released of all financial obligations for the loan, consumer advocates said. That release should be put in writing.

If the lender forgives the shortfall, that has tax implications because it is considered income for the borrower, said Steven M. Buckman, a real estate attorney in the District. "And any time you have income, you have to pay income tax on it, federal and state." Lenders are required by law to report canceled debt to the IRS, and borrowers should be sure to get a statement of how much was forgiven on the loan.

A Last Resort

Anita McKenzie's lender suggested she do a short sale. But McKenzie does not want to walk away from her home. She said when she bought her townhouse in Germantown less than a year ago, she believed her agent and broker, who told her she could immediately refinance into a more affordable mortgage.

The refinancing never came through, leaving her stuck with a $3,650 monthly payment on her $40,000 salary. McKenzie fell behind on her payments. She's in danger of losing her house this summer.

"I don't know what to do except file for bankruptcy," said McKenzie, who has been working with HomeFree-USA, a housing counseling agency in the District.

McKenzie's counselor advised against it. Like many consumer advocates, she argues that bankruptcy proceedings should be used as a last resort because they damage a filer's credit, though less so than a foreclosure.