Homeowners’ Guide to Avoid Foreclosure at All Cost

Short Sale vs Foreclosure

Homeowners facing economic hardships may have a foreclosure looming, but are often too proud or uninformed to do anything about it, until its too late.  Before considering bankruptcy or allowing the bank to foreclose, consider a short sale.  

Unlike a short sale, foreclosures are initiated by lenders only. The lender moves against delinquent borrowers to force the sale of a home, hoping to make good on its initial investment of the mortgage.

Also, unlike most short sales, many foreclosures take place when the homeowner has abandoned the home. If the occupants have not yet left the home, they are evicted by the lender in the foreclosure process.

Once the lender has access to the home, it orders its own appraisal and proceeds with trying to sell the home. Foreclosures do not normally take as long to complete as a short sale, because the lender is concerned with liquidating the asset quickly. Foreclosed homes may also be auctioned off at a "trustee sale," where buyers bid on homes in a public process.

In most circumstances, homeowners who experience foreclosure need to wait a minimum of five years to purchase another home. The foreclosure is kept on a person's credit report for up to seven years.

Although there is no guarantee your lender will agree to a short sale, here is a list of the benefits of participating in a short sale, versus being foreclosed upon. 

Benefits Of A Short Sale Versus Foreclosure

• Homeowner can apply for a short sale even if they're not behind in payments.

• There in ZERO COST to the homeowner in short sale. The lender pays all the selling costs and real estate commission. Meaning the homeowner has nothing to lose!

• The homeowner receives professional guidance from real estate agent when doing a short sale.

• A short sale may postpone the foreclosure action to allow enough time for house to be sold.

• Homeowner may qualify for financial or relocation incentives from the lender, and receive up to $10,000 for relocation from a government program called HAFA which provides an option for homeowners transitioning out of their mortgage.

• A short sale only affects your credit score between 50-70 points vs 200-400 points with foreclosure.

• Homeowner may qualify for another mortgage loan as soon as 2 years, as compared to 7 years with a foreclosure.

• Doing a short sale avoids foreclosure and waives the full deficiency owed by the homeowner. They can now walk away from the property free and clear.

• Possible tax relief from cancellation of any debt income.

• Short sales are not likely to affect jobs that require a security clearance.

• It is easier to recover financially and emotionally from a short sale than a foreclosure.

If you plan to simply pack up, leave and “let the bank have the property”. This is the worst idea ever for the following reasons:

• If you leave the house, you will still owe the balance on the mortgage plus penalties and late fees (which in many cases is tens of thousands of dollars). This means that by law you are responsible for paying off this balance over the next 10 to 20 years for a property you no longer own!

• If you walk away from the house, the bank will still try to recover the money. They can legally do this by garnishing your future wages and investments!

• If you let the property go into foreclosure, your credit score can be affected up to 400 points. This means that it is going to be hard to find somewhere to rent (if they do credit checks). It is going to be hard to get another mortgage for a very long time with a foreclosure on your record. It is also going to be hard to get credit (in general) with a foreclosure on your record.

• Having a foreclosure on your record can also be a hindrance in getting a job, especially ones that require security clearance.

Read What is Short Sale?.

 

Short Sale vs Foreclosure

What is Short Sale?

What is a short sale?

A short sale in real estate is a voluntary process that happens when the bank or lender allows the homeowner to sell the property for less than what is owed on the mortgage loan. The homeowner closes on the real estate property and the property is “sold short”. This can happen prior to the property entering the foreclosure process. The homeowner receives nothing from the sale.

With both a short sale or foreclosure, the homeowner ultimately loses his/or home. A short sale may allow you to avoid foreclosure and walk away with less damage to your credit score.  While a short sale will not show up on the homeowner’s credit report, the mortgage status will. For those in default, it’s a pre-foreclosure that has been redeemed, which is often reported as “Paid in Full for Less Than Agreed. A short sale, however, does not release the homeowner from the remaining loans, such as second or third mortgages, if any.

One benefit to a successful short sale is that some homeowners are now eligible to obtain a new mortgage loan for the purchase of a replacement house.  That is not possible with a foreclosure, which has a typical wait period of a minimum of 3 to 7 years.

Common Reasons That Result in Short Sale

• The home was refinanced at 100% (or greater) than its present fair market value.
• The home requires too many costly repairs to sell, and the market won't support a sufficient price.
• The home was financed with an interest-only loan, and homeowner is now unable to refinance.
• The home is located in a neighborhood or area with distressed economic conditions.
• The home was purchased at the top of the real estate cycle, and a substantial drop in value has occurred.

Read Short Sale vs Foreclosure.

Why Would a Mortgage Lender Agree to a Short Sale?

A short sale is typically faster and less expensive than a foreclosure. Many mortgage lenders would agree to participate in a short sale because the lender will incur a smaller financial loss compared to a foreclosure or continued non-payment.

How To Qualify For a Short Sale and (possibly) Avoid Foreclosure

A Short Sale may seem like an easy way out of a likely foreclosure, but not every homeowner qualifies for it. Even if they do qualify, the homeowner has to find a buyer, preferably a cash buyer, and the bank has to accept the offer.

A homeowner must meet the following requirements in order for the short sale to be considered:

A hardship letter. The seller must explain why he/she cannot keep up with making payments. The sadder the story, the better. A seller who is simply tired of struggling probably won't be approved, but a seller with cancer, no job and an empty bank account may. The most common acceptable reasons are divorce, bankruptcy, loss of job or some kind of emergency.

Proof of income and assets. It is in the best interest of the lender to recover funds from the home owner. If the lender discovers that the home owner has other assets, including retirement funds, they may prefer to liquidate these assets for payment on the mortgage, and denies the short sale. The proof of income and assets must include income tax and bank statements, going back at least two years. Sometimes sellers are unwilling to produce these documents because they conflict with information on the original loan application, which may have been fudged. If that's the case, this deal is unlikely to close.

Comparative market analysis. This document shows that the value of the property has declined, which essentially means the home owner has no equity in the property, and it won't sell anytime soon for the amount owed. The comparative market analysis should include a list of comparable properties on the market and a list of properties that have sold in the past six months or have been on the market in that time frame and are about to close. This analysis is very similar to the Broker Price Opinion, which is less formal but often more informative than a property appraisal. The prices should support the seller's contention that the property is worth no more than the short-sale price.

A list of liens. The home owner must be at least 3 months behind on the mortgage and has been served a lis pendens from the court indicating that the lender intends to foreclose on the property if they do not receive payment in the near future. There may be more than one lender or liens on the property, and all lien holders have to agree to take less -- or possibly no money at all.

A qualified buyer. A short sale is dependent on a quailed buyer making an offer to purchase. If an offer is not received, it will not qualify for shot sale. Even if tall the other criteria are met, it is possible that no one will buy the short sale. It is also dependent on the lender accepting the buyer’s offer. If the lender rejects the offer, a short sale will not take place.

* Since late 2008, the IRS has been releasing the federal tax lien. The IRS is not forgiving the back taxes that homeowners owe. It no longer requires the tax lien to be paid off before the property can be sold. This is making the short sale process a bit easier with one less lien to deal with.

Tax Consequence of a Short Sale

If the mortgage lender agrees to a short sale, the lender have rights to issue the homeowner an IRS-1099 for the shorted difference, due to a provision in the IRS code regarding debt forgiveness.

The Mortgage Forgiveness Debt Relief Act of 2007 allows taxpayers to exclude income from the discharge of debt on their primary residence. The debt must be secured by a principal residence and the total amount of the outstanding obligation may not exceed the original mortgage amount plus the cost of any improvements. Debt up to $2 million may be forgiven tax-free.

If a borrower, who is still living in the home, is able to make an arrangement with a lender that reduces the principal balance of a mortgage, the amount forgiven will not be taxed.

Read Hawaii Foreclosure 101.

Short Sale Process for Homeowners