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Avoid Foreclosure with a Short sale

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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.

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.

While there may not be an ideal solution to the problems you face, the choices you make can lead you to 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.

Comments (40)


S H.
Boise, ID  |  April 10, 2012
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.
Bills.com
April 10, 2012
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.
Dhamal S.
Milpitas, CA  |  March 08, 2012
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?
Bills.com
March 08, 2012
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.
Gretchen J.
Jacksonville, NC  |  January 09, 2012
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.
Bills.com
January 10, 2012
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.

Brooks, ME  |  November 22, 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
Bills.com
November 28, 2011
Your best course of action is to consult with an attorney who has experience in real property or contracts law.
Keith V.
Wildomar, CA  |  November 08, 2011
Our home (California) is worth about 180K. We owe 260K on the first and 40K on a second. We are current on both loans. We have refinanced since the original purchase. We are now retired and taking a 72t distribution from our respective IRAs that were funded from each of our 401k plans and lump sum distributions from our employer pensions. We had planned to sell our home by now but obviously, the underwater condition prevents that. We want to negotiate a short sale with the 1st lender but feel that the 2nd lender will not cooperate. Is a DIL a better option? We cannot continue to draw these large amounts from our IRAs and still fund our remaining retirement years.
Bills.com
November 09, 2011
You will need the cooperation of the lenders in order to do a short sale or a deed-in-lieu. Be aware of the tax consequences of either of these plans as well as your possible responsibility for the remaining deficiency balances. For more information read Bills.com article about a deed in lieu of foreclosure vs a short sale.
Paul G.
Columbus, OH  |  November 08, 2011
Currently my wife and I have a home that is worth 99,000 but owe 127k. Only my wife's name is on the mortgage but both of us are on the deed. The problem isn't the payments or affording the home, the problem is losing 30k on a 100k house. We need to move to get our young children into a better school system and get out of a fastly deteriorating neighborhood. I'd rather do a strategic default, go the short sale route and impact my wife's credit. I can then use my income and credit to go out and by our new house in just my name. What are some of the potential pitfalls of this? Will my name being on the deed/title have any impact? The monthly payment is over 30% of my wife's monthly income but not when you combine ours. Can a lender look at my income even though I am not on the deed? If they cant use my income to prove its not over 31% what are the options then? thanks for the help.
Bills.com
November 08, 2011
Let us say Spouse A owns a home and has a mortgage in his or her name alone. If Spouse B has a strong credit score, a long employment history, and a low debt-to-income ratio, he or she can buy his or her own property, too.

Your concern about your name appearing on the title is a red herring — a false issue. Your name on the title does not give the lender any right to pursue you for an action relating to the mortgage. If my reassurance does not satisfy you, ask a lawyer to file a quit claim deed for you to sign over whatever rights you have to your home to your spouse. By doing so you will have no connection to the property.

My advice? Download a Uniform Residential Loan Application (Form 1003), complete it using only your income and credit to see where you stand with your income only, and start shopping for a mortgage.
Vanessa D.
East Moline, IL  |  November 04, 2011
i live in illnois and am losing my home. I tried a government program to help me keep my home and have done everything they have asked me to do and they are still taking the home. I even tried making payments while i could and they told me to hold the money i know owe like 12k and have no way to pay it now i am on unemployement and want to pay off the balance owed to keep my home i have lived here for 12yrs how can i save my home and what would be my best option i am also wondering if i will owe any money if the house sells for less than i owe and what happens to the extra money if it sells for more than what is remaining on my mortgage
Bills.com
November 04, 2011
You mentioned Illinois. See the Bills.com resource Mortgage Foreclosure in Illinois to learn about your options, rights, and liabilities as an Illinois resident. Please ask any follow-up questions you may have on that page.
Tammy B.
Spokane, WA  |  October 31, 2011
my mortgage was discharged almost 3 years ago in chapter 7. if i short sale will this show on my credit? also will i be able to get a new fha loan? normally you have to wait at least 3 years after a short sale, but if it was discharged and doesnt show on credit...how will anyone know a short sale was done. fyi there are a couple late payments, but nothing being reported as it simply shows dicharged in bankruptcy.
Bills.com
October 31, 2011
Consult with your bankruptcy lawyer, or a lawyer who has real property or contracts experience to review your exact circumstances. Homeowners with a home loan discharged in a chapter 7 have no personal liability for their loans. That explains why the loan disappeared from your credit report following the chapter 7 discharge. In other words, homeowners can quit the property in question without liability. In your case, a short sale contract may obligate you to the deficiency balance, which is not in your financial interest.

Regarding an FHA loan, if it has been three years since your BK discharged, the fact that you have a BK on your credit report will not be enough to disqualify you. FHA rules require that a BK be discharged for at least 24 months. If you meet the standard FHA loan requirements, you should be able to get an FHA loan.
Lou B.
Stone Mountain, GA  |  October 22, 2011
I am 63 years old, sick and retired on disability. Current on mortgage but had to contact Chase about hardship DIL because of imminent default due to high anticipated medical expenses and nursing care, I can't afford to pay mortgage or maintain home anymore. Bank told me to list house for short sale and after 90 days if it did not sale, I would then be considered for DIL. The house is underwater for about $50,000 and Fannie Mae is the investor. I don't want to lose my credit rating but next month I will not have the money to continue paying. Don't want to just walk away but seems like I will be taking a gamble as to whether or not the DIL will be approved if no one buys my home.
Bills.com
October 24, 2011
If you won't be able to make your mortgage payment, because you have to devote your money (understandably) towards your medical needs, then your credit rating is going to suffer.

It seems that your best option is to try to sell the house and see if your lender will forgive the deficiency balance, based on your medical hardship. If you can't sell the home, even at a reduced price, then a DIL is the next best option.
Steven P.
Rancho Cucamonga, CA  |  October 18, 2011
Hello Bill, I have 2 mortgage loans. First loan balance $440000 and $110000 on second. The current value of the house is around $340000. I applied for loan modification for my first loan and is now being reviewed by an underwriter. I have not paid for 3 months on my first and 2 months on my second. My question is what are the chances that my 2nd loan initiates the foreclosure? I received a call from them saying they will proceed with the foreclosure if i cannot pay.
Bills.com
October 18, 2011
Unfortunately, this is common question lately. See the Bills.com resource Second Mortgage Foreclosure to see a discussion of this issue. In particular, see the reader comments on that page for additional clarification.
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Steven P.
Rancho Cucamonga, CA  |  October 18, 2011
Hafa will only forgive loan deficiency until 2012? Any chance that this will be extended?
Bills.com
October 18, 2011
When the 2012 deadline was set several years ago, I doubt few legislators believed this would need to be extended. Congress likes to work up to the 11th hour when passing legislation, as several recent examples prove. We can only guess if Congress will extend the deadline, as it appears many will need the relief it provides.
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