Before You Contact Your Mortgage Company, Understand Your Options

Your mortgage company will evaluate what is best for the investor. This guide helps you evaluate what is best for you, before you choose a loan modification, conventional sale, short sale, deed in lieu, or foreclosure.

You are about to make a decision that could affect your money, your taxes, your credit, and how long you stay in your home, for years. Most homeowners make that decision without understanding the full picture. The purpose of this guide is to change that.

Some of Your Leverage Against the Lender is Time, And It Shrinks Every Month You Do Not Pay

California law, combined with federal rules, can stretch the foreclosure process to 10 to 12 months or more of non payment when an attorney properly leverages every anti foreclosure protection: the federal cooling off period, the California foreclosure timeline, AB 2424, and the Homeowner Bill of Rights.

Your leverage is not just time. It is four things working together.

1
Time of non payment, with no money owed back
Many lenders, especially those represented by people in other states, do not understand that when you are well represented in California and you sequence your options properly, you will not owe the lender for the deficiency. They are not going to get that money back the way they might in other states. That changes the math entirely.
2
For many sellers, no taxes owed, even after the Mortgage Debt Forgiveness Act expired
For many, but not all, home sellers, if it is done right, they will not owe taxes even though the Mortgage Debt Forgiveness Act expired. California's anti deficiency laws and proper structuring can protect you, but only if the final documents are negotiated correctly before you sign.
3
When you make an offer, you are doing the bank a favor
What the lenders do not understand is that when you are making offers to them, you are really doing them a favor. You are letting them get the property back early. In exchange, you want to negotiate a better outcome than you would get after a foreclosure, or naturally after a deed in lieu, or naturally after a short sale. Generally that means you are trading credit damage. You are saying: I would like less damage to my credit, or no damage to my credit, and in exchange you are getting this property back very early, saving your investor tens of thousands of dollars, getting it back in excellent condition, and getting it back before the market goes down further.
4
The bank's own people often do not understand any of this
Unfortunately, because most of these representatives are in collection departments in other states, they do not understand it. So in your package you need to explain it, and ideally on the phone you have a credible lawyer explaining it every step of the way, every time they get into a substantive conversation.
5
Your first job is to get escalated out of collections
Many of the people in the lender's initial review department, which is a collections department, are not tasked with understanding any of this. They are just seeing you as a number that they have to process. So one of the major focuses of your short sale or loan workout is to present a file that those people see as something they should escalate to legal, or escalate to the experienced people in their department. Sometimes that department is called the Office of the President or the Office of the Vice President. You want to be escalated to someone who understands that your file is different and that you are well represented, so that then you get to start negotiating for results rather than just being treated the way a standard borrower is treated around the nation.
Once you are in front of the right person, they need to see that it is incumbent upon them to explain why your deal is good to their investor. They need to give their investor the choice to do this deal with you now, because if they do not do it now, they are likely to get the property back when it is worth a lot less, and they will have missed out on a long period of income.

When you combine all of that, that is how you win against the banks in California. It is not guaranteed, but it does work often enough.

The Difference: On Your Own, With a Realtor, or With an Experienced Attorney Broker

On your ownYou hold the leverage California law gives you, but you have no one to explain it to the bank's collection department, no one to negotiate the approval letter, and no one to protect you from a tax bill you cannot pay.
With a realtorA realtor can list and sell the home, but most realtors are not trained in deficiency, tax, and credit consequences. A poorly negotiated approval letter can turn a protected nonrecourse loan into a taxable event.
With an experienced attorney brokerOne person manages both the legal side and the sale. Your package explains the leverage to the bank. A credible lawyer makes the case on the phone. The approval letter is negotiated to protect your credit, your taxes, and your deficiency exposure before you sign anything.

But that leverage is lost a little more each month you go without paying. The closer the bank gets to taking the property back, the less reason it has to negotiate. That is why you should determine your best strategy early, ideally while you are still current.

Pro Tip: The Short Sale Listing Addendum Realtors Ask You to Sign

The California Association of Realtors has Realtors make you sign a document called a Short Sale Listing Addendum. In it, you acknowledge that you understand the Realtor is not allowed to speak to you about the deficiency, the taxes, or the credit consequences of your short sale, because Realtors are not lawyers. This work is very serious. What Realtors do is help people buy and sell houses, not counsel you on the law.

Pro Tip

Have your Realtor send you the Short Sale Listing Addendum two to three days early, before they come to the house, so you can read it and understand what they are going to ask you to sign. It is very important and may change your rights substantially.

Realtors are great at what they do, but understand their limits. That is why you really should have a Realtor and an attorney on your team, at no extra cost to you. The Realtor sells the house. The attorney protects your rights, reviews the approval letter, and makes sure the deal does not create a tax bill or a deficiency you cannot pay.

A loan modification is for a homeowner who wants to keep the property and can afford a lower payment

In our opinion, a loan modification is typically for someone who genuinely wants to keep the property and who has the means, or the documentation to show they will soon have the means, to pay a new, slightly lower monthly amount. As an example, the Fannie Mae and Freddie Mac Flex Modification is designed to reduce a borrower's principal and interest payment by roughly 20% by lowering the rate, extending the term, and, if needed, deferring principal. To qualify, the homeowner must document a hardship and demonstrate enough income to sustain the modified payment. That is the kind of borrower the program is built for.

You are welcome to explore a modification, but be very careful if the bank says they will only consider your application if you cease paying. We see a clear pattern: banks instruct homeowners to stop paying, use up the first three or four months without payment reviewing the file, and then deny the modification, often for people who had little chance of qualifying for a good one in the first place.

Each of those months is leverage you may never get back. If you do not truly want to keep the property, starting that process wastes your most valuable asset: time.

The mortgage forgiveness tax exclusion has expired, and the bank will send the IRS a form

The federal Mortgage Debt Forgiveness Act expired on December 31, 2025. For 15 years, most sellers never had to worry about taxes on forgiven debt. Realtors and CPAs got comfortable ignoring it. That protection is gone.

After a foreclosure, short sale, or deed in lieu, the bank will send out a 1099-A (foreclosure) or a 1099-C (short sale or deed in lieu) for the amount they consider themselves short. The IRS will look at that forgiven amount as income unless you find a way to exclude it. Bankruptcy or insolvency is one way to exclude it. California's anti deficiency laws can also help with non recourse loans, but only if the transaction is structured correctly.

This is why you must never agree to a poorly drafted approval letter. Banks sometimes provide short sale and deed in lieu approval terms that, once signed, may create a large tax bill you could be required to pay that absent such a poor agreement you might not have had to pay in California. The approval letter is the result and can impact your risk of the deficiency to the bank, taxes to the IRS and how long you suffer credit damage. It is your result for which you negotiate and give back your home. It is not just paperwork.

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If instead of going through the guide you would like to talk to an attorney, we offer a free consultation.

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Where Are You Today?

The right starting point depends on where you are right now. Choose the option that matches your situation to see the strategies that apply to you.

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