Of all the sellers we talk to on a daily basis one of the most heart wrenching conversations we have is the one about the possibility of foreclosure. A tragic side effect of declining values has been the number of homeowners facing the real possibility of losing their homes. Declining values can prohibit the sale of the home or refinancing due to the property now being over-encumbered for todayâ€™s value. This can leave homeowners struggling who cannot afford the payment or who must sell due to changed circumstances. For those who are confronted with this situation or who know someone who is, the options are limited. These options include keeping the home, renting the home, loan restructuring (also called loan modification), a short sale, or foreclosure. For the sake of brevity, letâ€™s examine a few of these options.
Loan Modification: Loan Modification is perfect for homeowners who have met with a temporary setback and cannot catch up on the back payments but can pay the current payment amount. In this case you can contact your lender who may agree to fold any past-due amounts, including interest and escrow, into the unpaid principal balance. This new amount will be re-amortized over a period of time. Or, if you are unable to make payments at the current payment rate, your lender may agree to extend your loan for a longer period of time, modifying the payment amount to a more affordable level. In either scenario, a Loan Modification will bring your account current.
Short Sale: The definition of â€œshort saleâ€ is a property where more is owed on the property than the current market value. In this scenario, a seller with a legitimate qualifying hardship (loss of a job, marriage failure, etc) in cooperation with their current lender(s) sells the home for less than is owed. The bank(s) then agree to lower the payoff amount of the loan(s) to facilitate the sale. Numerous banks are currently participating in these short sales in order to avoid the often greater loss of proceeding with a foreclosure. However, not all sellers qualify. It is always best to speak with your lender to confirm they will participate with you in a short sale. Here are the typical requirements to qualify for a short sale agreement with your lender:
- The property needs to be a primary residence or second home. Some lenders will not do short sales with investors. If you are an investor, make sure you meet the remaining qualifications and contact your lender to determine their policy.
- Your payment is delinquent or about to be. Most lenders will not work with homeowners who are successfully making their loan payments.
- You have a qualifying hardship. Examples that qualify are divorce, loss of a job, medical bills, etc.
- You have no other assets. Lenders who see homeowners with 401Ks and large bank accounts are less likely to cooperate on a short sale.
- The loan has been in place close to one year or more. If the loan is not approximately one year old or more, the current lender may choose to charge the loan back to the originating lender.
If a seller meets the lender criteria for a short sale, they then place their home on the market for sale. Once an offer is accepted, the offer and supporting documentation is submitted for lender approval. One caveat, currently the Loss Mitigation Departments at most lenders are overwhelmed with the number of files submitted for approval. Lenders are taking anywhere from one to three months to approve these files. These delays can be frustrating to both buyers and sellers of these properties. If you are a seller, your best option is to hire a real estate agent who does short sales to guide you through this process and explain the pros and cons.
Foreclosure: The last option is foreclosure of the home. This is where the owner simply ceases making payments and walks away from the home. Currently, the government and the lending industry are taking aim at â€œwalk-awayâ€ home owners who stop making payments and months later send the house keys back to their lender.
If you or someone you know is considering a short sale or foreclosure, it always a good idea to consult an attorney first. This article should not be construed as legal advice. Our goal, as always, simply remains to help our clients through this challenging market. If you would like the numbers for both local and national homeowner hotlines or are considering a short sale, please contact us so we can further explain your options. Or contact us and we will send you our Mortgage Relief Kit. Above all remember, this too shall pass.
Russell & Wendy