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Avoid Foreclosure with a Short sale

mortgage 4

Updated: Oct 20, 2014

Highlights

  • Review ways to avoid foreclosure that require you to sell your home.
  • Examine the government program that helps you avoid foreclosure.
  • Understand the impact of a short sale on your credit.
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A short sale or deed-in-lieu of foreclosure can help you avoid foreclosure.

If you have mortgage problems, you may take every reasonable step to stay in your home and find out that nothing you tried worked. As tough a decision as it can be, you may decide that selling your home is the best available choice. Start off by researching the value of your home.

If your home is worth more than what you owe on it, you have greater flexibility than if you owe more than your home is worth. If you have equity in your home, selling your home and moving into a less expensive home, either a home your purchase or rent, will lower your monthly costs and reduce your financial stress.

If you must sell your home when your home is worth less than what you owe on it, different problems arise. Your goal is to avoid foreclosure. When you are upside-down on your mortgage and want to sell your home, you can’t sell your home without your lender’s permission. Speak to them at the first sign that you are having problems with you mortgage. You may think that you have no option but to sell your home, but speaking with your lender may offer you other solutions.

If you are not able to work out any other solution, then you have two main options, as short sale or a deed-in-lieu of foreclosure (DIL). Both of these options are preferable to a foreclosure. They do less damage to your credit rating. In both cases, you may be left with a deficiency balance, leaving you with both a debt to deal with and possible tax implications.

Short Sale and DIL Requirements

Though this list may not be exhaustive and other lenders may have slightly different criteria, Bank of America, one of the largest lenders in the US, requires the following:

  • You are experiencing a hardship, such as a job loss, medical emergency, or divorce
  • You are upside-down on your mortgage
  • You are unable to stay current on your mortgage payments
  • You were unable to modify your loan

Short Sale

The first option is a short sale. A short sale is when you sell your home and your lender agrees to accept less than you owe on the balance of your loan. Generally speaking, your lender will only approve a short sale if you are behind on your mortgage payments or can show you will be unable to continue making your payments . In order to be approved for a short sale, you will have to provide your mortgage lender's loss mitigation team with documentation of your income and assets, so they can verify that you have a financial hardship and that you truly cannot afford the home.

You need to receive permission from your mortgage lender agree ahead of time, in order for the short sale to proceed. It is a waste of time for you to put your home on the market until you, or your attorney, have spoken with your lender company's loss mitigation department to discuss proceeding with a short sale. Many lenders will authorize short sales in an attempt to prevent property from falling into foreclosure; however, some lenders will not allow short sales to proceed.

You want to get as high a price as you can in the short sale for two reasons. One is so that your lender will approve the short sale. If you do not sell it for a price your lender feels is fair, your lender can stop the sale from going through. A second reason is so you can pay off as much of your mortgage balance as possible. When you sell your home for less than you owe, you are left with a deficiency balance, the difference between what you owe and what the home sells for. Your lender may forgive the deficiency balance or it can reserve the right to collect it from you.

Deed in Lieu of Foreclosure

The second option is a deed-in-lieu of foreclosure (DIL). In a deed in lieu of foreclosure, you give the property to your lender voluntarily, in exchange for the lender canceling the loan. The item transferred is the deed to the property. The lender promises not to initiate foreclosure proceedings or to terminate any foreclosure proceedings already underway. The lender may or may not agree to forgive any deficiency balance resulting from the sale of the property.

The key issue in a deed in lieu of foreclosure is whether the lender is willing to forgive the deficiency balance. Read your contract carefully, to see how the deficiency balance issue is handled. If the document is unclear, take it to an attorney with experience in property law. An attorney’s time is not cheap, but will be a bargain compared to signing an agreement you do not understand. Don’t leave yourself vulnerable to receiving the unpleasant surprise of a large, unexpected debt.

Government Programs

If your lender participates in the Making Home Affordable (MHA) program, then your lender is bound by the program guidelines and deadlines. If your lender is not part of the MHA program, it still may have chosen to participate in the program, in which case it is also bound by the program guidelines. Many lenders have chosen to do so. There is no requirement that you must participate in a HAFA short sale or DIL, but the guidelines and deadlines benefit most home owners, so they may help you.

Homes Affordable Foreclosure Alternatives (HAFA)

The MHA short sale and DIL program is called Home Affordable Foreclosure Alternatives Program (HAFA). Under HAFA, participating lenders must forgive the deficiency balance for DILs and short sales. To qualify for the HAFA program, you must meet all the following eligibility requirements of the government HAMP (Home Affordable Modifications Program):

  1. Your loan must be serviced by a lender who participates in the HAMP program
  2. Your home must be your primary residence
  3. You are having trouble paying your mortgage
  4. Your current mortgage was taken out before January 1st 2009
  5. Your home value is less than $729,750
  6. Your current mortgage payment, including your property taxes and homeowner’s insurance must be more than 31% of your income.

HAFA alternatives are available to all HAMP-eligible borrowers who:

  • Do not qualify for a HAMP Trial Period Plan
  • Do not successfully complete a HAMP Trial Period Plan
  • Miss at least two consecutive payment during a HAMP modification
  • Request a short sale or deed-in-lieu.

HAFA is complex with numerous guidelines set by the Treasury Dept. These guidelines do not apply to loans by Fannie Mae, Freddie Mac, FHA or VA because these programs have their own short-sale programs that vary from HAFA.

HAFA provides incentives to mortgage lenders, sellers, and other lien holders. There are deadlines that the mortgage lender and other lien holders have to follow, to provide timely progress on the sale of the property. HAFA simplifies and streamlines the short sale and DIL process, by providing a standard process flow, minimum performance timeframes, and standard documentation.

Summary

Make sure to review all your options, if you feel that you must sell your home to get from under your mortgage. Consider speaking with an attorney that specializes in real estate or property issues. Be careful of any firm that offers to save your home. There are dishonest companies that look to prey on you, when you are in the vulnerable situation of having to sell your home. Don’t sign any contract without having a competent third party review it.

There may not be an ideal solution to the problems you face. However, there is a difference between the choices available to you. You may be choosing between a decent solution, a poor solution, or a terrible one. Take the time to educate yourself, so you can implement the best possible solution for you and your family.

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42 Comments

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  • JD
    Jun, 2012
    J.
    Hi Bill one year ago I sold my house in short-sale. I still have good credit. no balance owed on home. credit score (676). Do I have to wait 7 years to purchase another home, that what I was told by a lender.
    0 Votes

    • BA
      Jun, 2012
      Bill
      Fannie Mae will buy loans from applicants who had a short sale more than two years ago. I do not know the rule for Freddie Mac. For non-conforming loans (not Freddie or Fannie), the investor will make up their own rules. I doubt you will have to wait 7 years. Contact a different loan officer at a different originator, which will probably have a different rule.

      One thought: Loan origination is now more difficult and time consuming than before. As a consequence, loan officers work harder to earn less. The originator you talked to may have heard about your recent short sale and rather than work to find a loan for you, he or she made up a ridiculous but plausible-sounding rule to get you out of their office to spend time on an easier, and hence more profitable loan.
      1 Votes

  • SH
    Apr, 2012
    S
    Bought a townhouse in Boise in July 2007 (If only I'd waited ONE MONTH!!!) for $138,000. The House is now only worth $72,000. Four other houses in 8, have short-saled ($66,000 to $89,000 ea). I still owe $130,000 on the loan. Considering strategic foreclosure as payments are not a problem. I want to take advantage of the 2012 tax exemption for short-sale/foreclosure. I need to move so my daughter can attend a certain school and I plan on renting. Due to the cost of the other homes in the area, I feel I am pouring my $58,000 difference down the drain and into a banks pocket, and I will receive NO equity. Mortgage is $988 a month, but rentals in the area are going for $650 a month, so I wouldn't be saving anything if I rented. I have been told by YouWalkAway.com that a short-sale wouldn't work for me since I cannot document a financial struggle. So am I left with a foreclosure situation by literally just walking away? Given the cost of my mortgage and the homes true value, this is a LOUSY investment.
    0 Votes

    • BA
      Apr, 2012
      Bill
      Consult with a local lawyer who has foreclosure experience, and not a Web site (including Bills.com), for personalized legal advice. Strategic default is a big step, and has a large potential liability if the deficiency balance is the expected result of a foreclosure. You may be able to take steps to insulate yourself from a deficiency balance or avoid a deficiency balance. Each mortgage servicer has its own short sale rules. Do not assume you are ineligible for a short sale because you are not in financial distress.
      0 Votes

  • DS
    Mar, 2012
    dhamal
    I am in California and would like to do a short sale. I have my first loan with BOA (5/1 ARM) and 2nd with Green Tree (conventional 30-year balloon loan). Both were used to purchase house. Haven't been refinanced. House is underwater (below the first loan balance). Is 2nd a non recourse loan? If I short sell, can 2nd still try to collect the deficiency balance?
    0 Votes

    • BA
      Mar, 2012
      Bill
      In California, purchase-money loans are so-called "no-recourse" loans. A no-recourse loan in one in which the lender may not pursue the borrower if there is a short sale or foreclosure that results in a deficiency balance.

      If both of your loans were used to purchase the property, then they are subject to California's no-recourse/anti-deficiency law. If that is the case, you can walk away from the home and your credit will suffer, but no mortgage debt will follow you. You could use your ability to walk away as leverage to reach some kind of settlement with the lenders that does less harm to your credit. I suggest you make 100% certain your loans are non-recourse before finalizing your strategy.
      0 Votes

  • GJ
    Jan, 2012
    Gretchen
    Currently, I own two homes. One is our primary residence and the other was supposed to be an investment property. We added an addition onto the home with an equity line. The mortgage of the investment property is with one bank and the equity line is with another. When we finished with the addition, and had the house appraised, it appraised for more than the mortgages. However, in recent years, the housing market has tanked in our area. Currently, we are paying a property manager 10% of rental proceeds, and the rent coming in is less than the mortgage and equity line payment. Also, there seems to be small repairs that add up every month and now it is looking like the septic system is going to need to have major repairs. I cannot afford to make these repairs. How do I get help? I do not even know where to begin to see if foreclosure, short sale, etc. is the best option. Please advise. Thanks.
    0 Votes

    • BA
      Jan, 2012
      Bill
      If you problem is a cash flow problem then you can attempt to refinance one or both of your properties. If your property is underwater, then look into the Harp Mortgage program. If you cannot afford the payments, then you should speak with your lender and seek to modify the terms of the loan. If you have to make a short sale, then you will need to speak with the lender. Remember, ifyou have a deficiency balance on your investment property, then you will need to negotiate a payment schedule.
      0 Votes

  • 35x35
    Nov, 2011
    i am a widow and am now in foreclosure. I owe 35000 on my home and it is valued at 13000 but the private mortgage holder will not work with me cause he wants me to sign over property. I asked him if i could rent it to generate income to get caught up and i could add to their rent so it could get caught up quickly. I moved myself and daughter in with a friend and within a month he contacted them and told them he was going to foreclose on me so they do not have to pay rent. I have deposited 1000 into his account and have another 1600 he will not take this. The tenant have not paid rent and will not vacate. I have to take them to court which has been two months. What can i do I feel I have been set up. thank you
    0 Votes

    • BA
      Nov, 2011
      Bill
      Your best course of action is to consult with an attorney who has experience in real property or contracts law.
      0 Votes