Your Options When Facing Foreclosure.
If you're facing foreclosure, then you are probably under stress. You don't know what is going to happen. How long will it take before the bank kicks us out on the street? Will I owe my lender a ton of money? Will I ever get my life back? That's why we put this site together. You need to know what your options are. So, let's go thru them here.
Do nothing and the lender forecloses on the house. Please be aware that in most states the foreclosure process can take a long time. I've seen it take some lenders up to a year to foreclose on a house. Some banks have better lawyers and can get a foreclosure done in 3-4 months. But, that is often rare.
Deed-In-Lieu of Foreclosure. A "Deed-in-Lieu" is where you surrender your home to the lender. This enables the lender to sell your home faster and protect their investment. What benefit does it give you? None. Do not consider this option unless the lender gives you something in return.
Loan Modification to reduce your mortgage payment. If you want to keep your home, then it is a good option. Many lenders will reduce your interest rate, or extend the term of the loan. To qualify, you often have to send your lender all of your pay stubs, bank statements, and other financial documentation.
Reinstatement. This is when you pay the lender for all back payments, late fees, and other related costs. After that you start making normal monthly payments. This restores your account to its former current status. The only problem is that it requires you to come up with all the back payments and other fees.
Get a New Loan and pay off your old loan. This is a good option if you still have equity in your home. However, if you owe more than your home is worth, then it will be hard to find a lender willing to pay everyone off. The other problem is that when your credit history shows late payments, then it will be hard to get a new loan.
Sell the property. If you don't want your house anymore, then this is a good option to consider. However, if you owe more on the mortgage than the house is worth, then you will need to sell thru a short sale.
Rent the property. This is a good way to earn some extra money. However, many mortgages are written with legal clauses that force you to forward any rent proceeds to the lender. In addition, many local and state governments have recently written laws forbidding you from renting a property unless the mortgage is current.
Bankruptcy. This used to be a great option for a fresh start. However, in recent years the bankruptcy laws were tightened up considerably. The law now forces the bankruptcy judges to steer you to a Chapter 13 bankruptcy. This is versus the better bankruptcy option, which is a Chapter 7. The difference between the two is that a Chapter 7 gets rid of all your debts. A Chapter 13 basically sets you up on a court monitored repayment plan.
Under a Chapter 13, many people find themselves stuck under the same burden of debt that caused the problem in the first place. Only this time, they have to pay all the extra costs associated with the bankruptcy. I've heard some experts say that your just better of not paying your creditors than doing a Chapter 13 bankruptcy. This costs you less money out of pocket and your credit gets cleaned up faster.
Short Sale. A short sale is when you owe more than your home is worth. You sell it with the assistance of a licensed real estate agent. It costs you nothing. The agent gets paid by your lender. It is well known that a lender will net more money on a short sale than taking a home back thru foreclosure. Why? A lender saves money on interest, attorney fees, and other related foreclosure costs.
Frequently Asked Questions about Short Sales
First off, there are many misconceptions about foreclosure, deed-in-lieu, and short sales. I hope to debunk them here.
Common Foreclosure Myth #1:
No matter what I do, I'm going to owe money to someone. On most short sales, the seller is able to walk away owing the bank nothing. Of course, it's all up to each individual bank, but eight times out of ten, you can walk away owing nothing. A bank loses way less money on a short sale than a normal foreclosure. In return for you helping them out, they will help you out. Here is why there is this big difference between a short sale and a foreclosure.
On a short sale, the utilities are turned on and someone is living in the house. A vacant house is way harder to sell. The buyer knows the home is bank owned and will adjust their offer down because of that. On a bank owned house, the house sits there for 6-9 months empty before it sells. The bank has to pay to keep it up and insure it. They can't loan that money out and collect interest. Also, there is the liability if some kid goes into the house and gets hurt. Because of that the banks want to do short sales and are very willing to work with you.
A Foreclosure will go off my record in 3-5 years. Yes, you might be able to get a loan after 5 years, but here's the problem. When you walk away, the bank will come back and get a judgment for the money they lose, and also any money they have to spend. They'll tack on attorney's fees, late payments, interest, maintenance, lawn mowing costs, realtor fees, locksmith costs, title insurance, and all sorts of other fees. This judgment will stay with you until you pay it off. Let's say you owe $200,000 on your home and it's now worth $170,000. According to a study done on this, if you do a short sale, the bank will lose 19%. But, if the bank takes the home back and waits for it to resell, they will lose 41%. That means you'll owe them $82,000 on average. That is the judgment amount.
This deficiency converts to a judgment and judgments can sometimes last up to 20 years. Most of the time, the bank itself will not come after you. But, the bank will sell the right to collect the money to a third party collection company. That company will then attempt to collect from you.
Have you ever experienced the calls you get when you get behind on a credit card? Those people are vicious! They just keep calling and calling and calling. Not only that, but they will drag you to court and ask for all your financial information. They can force you to bring in your bank statements and information on any retirement accounts such as an IRA or 401K. And if you don't bring in this information, they can have a warrant issued for your arrest. You may have no prior criminal history, but you will after that. The court gives judgment collectors a lot of ways to go after you. They can send a cop out to your house to grab anything valuable. Do you have a nice TV? They might take that. Is your car paid off? If it isn't absolutely necessary for you to use to get to work, they can take that too. No one will give you a loan with that judgment on your credit. You might not even be able to get a cell phone.
The worst thing is that this debt purchasing company will be going after you for 10 or even 20 year. They will do whatever they can to collect what they think is "their money." Even your current and future employment might be affected because many employers now require credit checks.
A Short Sale will take 8-12 months and can drag out even longer. This is the case when the person you are dealing with doesn't know what they are doing. Our short sales average 45 to 90 days. We do these every day, day in and day out. The difference between dealing with someone who knows what they're doing is this. It's like the difference between hiring a top dog lawyer for a lawsuit versus hiring your friend who isn't a lawyer.
When we work with you we will handle everything and do all the work. All you have to do is provide us with basic documents and that's it. We will call the bank, handle the negotiations, and keep you updated as to what's going on.
Banks and lenders rarely accept short sales. We are able to get short sales accepted most of the time. Here's why your bank may have already told you they will only take X amount. But, let's say someone owed you a lot of money and they wanted to pay you only half of what they owe. What would you say? You'd probably tell them to pay you the full amount, right? But, if the person came to you with cash and told you they just simply could not afford to pay you any more, what would you do? You'd probably accept whatever you could get, right? Well, it's the same way with a bank.
The banks often tell you they won't take a short sale. The reason is because they want you to pay them the full amount. Or, they want to get you to agree to pay them monthly for the rest of your life.
A Short Sale is no less damaging to my credit than a foreclosure. I can tell you one thing. Fannie Mae and Freddie Mac, who hold the loans on about half of the loans in the country don't think so. They recently changed their requirements. Fannie Mae only requires two years on a short sale before you can get a new loan. If you give the house back to the bank, you have to wait for five years. Several new requirements now apply that can drag this out to 7 years. These companies are the backers of more than half of the loans issued today. This makes foreclosure more damaging than even a bankruptcy, which requires a 4 year wait.
Is a Short Sale right for me?
It depends on your situation. Many people decide to do a short sale when that can't afford their mortgage payment, have already moved out of the house, or experienced a loss in income. Your lender would rather get this resolved now rather than take the property through foreclosure.
Your lender is looking to limit any loss on your loan. Upon completion of a successful short sale, your lender will end up with more money in their pocket than a foreclosure. Bottom line, your lender wants to work with you.
I have two loans. Can I still do a short sale?
Yes. We will work to process a settlement with both lenders. Oftentimes both loans are with the same lender. In this case it's almost like negotiating with only one lender. If the first mortgage forecloses on the house the second lender loses everything. That causes them to be much more willing to cooperate. You can still do a short sale even if the sales price is less than what is owed to the first mortgage.
How does a Short Sale affect my credit?
A short sale will negatively affect your credit score, but not nearly as much as a foreclosure or deed-in-lieu. With a short sale, you can buy a house in 2 years versus the 5-7 years you will be forced to wait if you have a foreclosure on your record. A foreclosure or deed-in-lieu affects your credit for a longer period of time.
In addition, many employers are now checking people's credit before hiring them. Having a foreclosure on your credit will make it tougher to get a job.
What do you charge to help me with a short sale?
We do not charge anything to help you with a short sale. Your lender pays all the costs including title company fees, closing costs, property taxes, and any back taxes or Homeowner's Association Fees.
Do I need to be behind on my mortgage payments to qualify for a short sale?
No. You can do a short sale and never get behind on your payments. Many lenders request a genuine hardship such as a job loss or job transfer.
How long does a short sale take?
It depends on the lender and other factors. Some short sales are done in 60 days while others take 6 months to finalize.
Will I owe my lender any money for the loss?
The answer depends upon the type of loan you have and the lender you are working with. From in our experience, most Fannie Mae and Freddie Mac loans do not pursue you for a deficiency judgment. In addition, in our experience, FHA and VA insured loans do not pursue you for a deficiency judgment. Because laws and loan contracts vary, we will never know for sure until we get your lender's short sale approval letter.
The short sale approval letter will spell out whether or not the lender can pursue you for a deficiency judgment. In addition, if your lender issues you an1099, they will no longer have the option to pursue you for a deficiency. The law does not allow them to write off the debt, issue you a 1099, and then pursue you for a deficiency. We recommend that you discuss this issue with counsel.
Will I be responsible for income taxes to be paid on the loss?
Most of the time the answer is no. The Mortgage Forgiveness Debt Relief Act of 2007 made most short sales tax free. I still recommend that you contact a competent accountant or other tax professional.
How do I get started on a short sale?
Here is what we will do to help you with your short sale.
We put your home up for sale and market it to find a buyer. We do all the standard stuff that it takes to sell your home, just like all the homes we've sold in the past.
We gather all of the necessary documents to process the short sale.
After we find a buyer who wants to purchase the property, we contact your lender's loss mitigation department. We ask them what documents are necessary to submit the short sale package and how to send it to them.
We submit the buyer's offer and all the short sale paperwork to your lender. We have a complete checklist that we follow so everything is submitted properly.
We follow up with your lender to negotiate the short sale. There is a lot of time involved at this stage of the process. Many lenders short sale departments are busy with an avalanche of file. However, with a little patience and perseverance we will do everything we can to get the lender to approve the short sale.
Upon lender approval we then coordinate everything to a successful closing. We follow up with all the inspections, appraisals, surveys, and the buyer's financing.
Closing. Most sellers are so glad to be done with the stress and uncertainty. It's closure.
If you are interested in a short sale, then call us at (301) 884-7000.
Remember we are here to help you in any way that we can.
P.S. A Short Sale costs you nothing. We get paid by your lender. It is well known that a lender will net more money on a short sale than taking a home back thru foreclosure. Why? A lender saves money on interest, attorney fees, and other related foreclosure costs.
Don't wait call us today!
Disclaimer: Please note that this article was written by
Fitzgerald Realty & Auctioneers to provide objective information and to
also reflect our opinion of good practice at the time of its’ writing for the
general benefit of those considering sale or purchase of real estate. It is not
intended as definitive legal advice and you should not act upon it as such without
seeking independent legal and financial counsel. Frequent changes in the law
and standards of practice may cause this information to become outdated and no
longer applicable or even incorrect.