Little known facts about avoiding foreclosure

Unfortunately there is a very high foreclosure rate across the country but there is an option available to homeowners to eliminate the financial burden and possibly save the credit. 

This option is known as a “short sale” and the name is derived from the fact that the payoff amount agreed to in the transaction is less than (or shorter) than the mortgage balance.  In short (no pun intended), the home is worth less than what is owed on it.

How does this happen?  There are many scenarios but one common situation occurs when a homeowner refinances and pulls out a lot of money for a 2nd mortgage, for example, and the home may have appraised high and the homeowner took all the equity out for personal use to pay off credit cards, finish a basement or take a trip.  Then down the road the homeowner loses their job or becomes ill and unable to work.  You can see how this has a domino effect and eventually a mortgage payment is missed and the lienholder begins the foreclosure process.

So a seller may choose a short sale because their options are limited.  Here are a few of the options a seller can choose from.

1) Let the lender foreclose.  Not a great option obviously because it will destroy their credit making it difficult to even find a place to rent.

2)  Hire an agent to negotiate a short sale with the lienholder.  This is a long, drawn out process so the sooner you hire an agent experienced in short sales the higher the chance of finding a resolution before the home is lost.  This will put a ‘ding’ on the seller’s credit but it is a minor bump compared with a foreclosure and after 2 years, homeownership would be possible again.

3) Deed in lieu of foreclosure which means the seller signs the house back to the bank.  However many banks do not want a house back as they are not in the real estate business.  Most of the time a bank will recommend choice #2.

4) The seller can reinstate the loan by paying back all the past due monies, interest, penalties and fines.  Obviously if a homeowner had this kind of money they wouldn’t be in this situation to begin with…so not really feasible.

5) Ask the bank for a Forbearance Agreement.  This would take all the money owed and put it on the back end of the loan and essentially start all over again.  But this is highly dependent on credit history, payment history and how long the lender has carried the loan and if the bank feels comfortable enough to take the risk with the homeowner.

As you can see, a short sale can be a nice option for the homeowner at risk of losing their home.  There are tax liabilities at stake with a short sale which I will touch on in another posting.

If you find yourself in a situation where you think you may not be able to make a mortgage payment or might have missed one already, I would strongly encourage you to contact the mortgage company immediately and explain your particular situation. 

Please contact me with any questions you have about foreclosure and let’s make sure you don’t destroy your credit.