- 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
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.
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):
- Your loan must be serviced by a lender who participates in the HAMP program
- Your home must be your primary residence
- You are having trouble paying your mortgage
- Your current mortgage was taken out before January 1st 2009
- Your home value is less than $729,750
- 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.
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.