Foreclosure Short Sale

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READER QUESTION

Should I stop paying the mortgage and let my bank foreclose on me, or do a short sale?

Read full question
Bills.com Resident Expert
Dec 12, 2011
HIGHLIGHTS
  • Examine alternatives to foreclosure.
  • Review how a short sale works.
  • Understand your options, if you are left with a deficiency balance.
BILL'S ANSWER

 

Editor's note

: See the Bills.com resource Home Affordable Foreclosure Alternatives Program for an updated discussion of deeds in lieu of foreclosure and short sales.

Avoid foreclosure if you have equity

Generally speaking, allowing a home to go into foreclosure is not a good idea, as the consumer will lose any equity built up in the home and also suffer a terrible credit impact. In some cases, though, consumers have no choice but to allow a foreclosure to proceed.

You state in your question that you will "lose out on 30k" if you sell the home. I assume that you mean that you owe $30,000 more on the home than it is worth. You need to rid yourself of the home, as you cannot afford the mortgage payments, but unless you plan the sale or foreclosure carefully, you could be left with a large deficiency balance, which could result in a judgment against you.

Short sale

The easiest way that you can free yourself of this obligation without owing a deficiency balance is through a "short sale," in which the mortgage holder agrees to accept less than the balance owed on the mortgage at sale to prevent foreclosure. The lender would much rather see you sell the property than be forced to take the property through foreclosure, as foreclosure is a costly and time-consuming process. You should contact your mortgage lender to discuss what it can do to assist you in selling the property through a short sale, and what are its procedures and requirements. Explain to the lender that you cannot afford your mortgage payments, and that you need to sell the property through a short sale to prevent foreclosure.

Given the information you have provided, I think a short sale may be the best solution available, if your lender will allow it.

If the lender will not allow you to sell the home for less than you owe, you may have no choice but to allow the home to go into foreclosure, although foreclosure presents major problems. Foreclosure auctions tend to bring significantly less money than a normal sale would bring. If the sale brings less than the amount owed on the loan, the remaining balance of the loan may be considered a deficiency balance.

Nevada collections

Nevada law allows creditors to collect deficiency balances on home loans, meaning the creditor could sue and obtain a judgment against you if there is a deficiency balance. Given that you owe $30,000 more than the home is worth, foreclosure will probably result in a large deficiency balance, which could cause your significant problems in the future, such as wage garnishment and bank levies. Clearly foreclosure is not an attractive option, and should be avoided if at all possible. See the Bills.com resource Nevada Collection Laws to learn more about your rights and liabilities under Nevada law.

Deficiency balance alternatives

If you have no choice but to allow foreclosure, you may be able to mitigate the negative impact of a deficiency balance by filing bankruptcy. Generally speaking, deficiency balances are treated like any other unsecured debt in bankruptcy, meaning that they can be wiped clear by Chapter 7, and repaid over time through a Chapter 13. If your lender will not allow a short sale, you should consult with an attorney to discuss the legal implications of foreclosure and bankruptcy before you decide how to proceed. You can also visit Bills.com bankruptcy page to learn more about bankruptcy. No one wants to file bankruptcy, but you may find that bankruptcy is the best solution to your problem if the mortgage lender will not allow you to sell the home through a short sale.

To read more about foreclosure, I invite you to visit the Bills.com foreclosure information page.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

Comments (22)


Avatar
Crystal Y.
Sparks, NV  |  April 12, 2011
do you know if it legal in the state of nevada for a landlord to keep collecting rent on a property that is in a short sale? landlord is oboiusly defaulting on the mortgage.
Avatar
Bills.com
April 12, 2011
Yes. Whether the landlord is current on his or her payments to the mortgagee is not relevant to his or her right to collect rent or lease payments on the property.
Avatar
Bills.com
September 13, 2010
You are correct that the Federal Housing Administration (FHA) has initiated a program for a ‘short refi.’ This program is aimed to assist homeowners who are underwater on their property. However, there are many potential problems with the program as it stands. The first problem is that the mortgage holder must voluntarily agree to write off at least 10% of the principle balance on the current mortgage. Because the write-off is required but voluntary, it is not clear that lenders will volunteer to do so. Another issue is the new FHA loan cannot exceed 97.5% loan-to-value and the total combined loan-to-value cannot exceed 115%. Many homeowners are more severely underwater than these limits; therefore, they will not qualify for the program. Other issues include FHA loan limits, income qualifying factors, the presence of second loans on many properties, and the need for the borrower to be up-to-date on the current mortgage payments. I do not discourage anyone from trying to work a short refi, but I will not be surprised if the program has a very limited reach.
Avatar
Corinne .
September 12, 2010
Another option is short refinance. By doing a short refi you can keep your home in Vegas, if that's what you want. And you can keep your home for a more affordable price, since it will be reassessed at current market value, which we all know is very low in most areas. You're also likely to get a lower interest rate with the new assessment. This is the way to go if you want to hold on to your house or sell it for a profit later on. New FHA short refi guidelines implemented earlier last month and this month are relaxing their requirements for a short refi because they're trying to discourage foreclosures. You can check out the home loan academy for more info on short refi. Good luck, man.
Avatar
Karen .
March 25, 2010
Also, you can check for a lot of extra information on short sales and foreclosure.
Avatar
Bills.com
February 16, 2010
Greg: Look into a short sale. See the Bills.com resource Deed In Lieu Of Foreclosure vs. Short Sale for a more extensive discussion of this subject.
Avatar
Greg H.
February 16, 2010
In Dec08 I cosigned for a 300k home in Las Vegas with my daughter. She and her boyfriend subsequently lost their jobs there and moved back to our house in California. I am trying to figure out what to do with the Vegas house. I guess I have "deep pockets" and could afford to keep making the mortgage payments and rent the house for about a $1000/mo shortfall and hope for a recovery in the distant future or else sell the house now for a huge loss. I wouldn't go broke in either case but I would obviously like to minimize my losses. Anyone have any suggestions?
Avatar
Bills.com
January 31, 2010
One possibility, if you are married, is put one house is spouse A's name and the other in spouse B's. One spouse can be a "lifeboat" while the other takes the legal and credit report hit. If the "saved" house is in Florida or another state that allows 100% exemption, that house cannot be touched by a judgment-creditor. Consult with an attorney in your state who has experience in bankruptcy law who will be able to review your entire financial picture and advice you accordingly.
Avatar
Kevin B.
January 31, 2010
if u have no other option other than to allow forclosure on home, what can u do to protect another home that u can afford to keep payments current. figuring that the forclosing home is recieving no assistance from lender (short sale and rework of mortgage has hit a wall)?
Thanks for your feedback!

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