The Federal Reserve and Government forecasters agree: the Great Recession is over. But is it? Not for millions of Americans whose homes remain underwater thanks to the sub-prime mortgage scandal. Nor is it over for the millions more who lost their jobs and have only been able to secure part-time work with less pay and no benefits.
For many the ultimate insult is when their bank refuses to work with them and turns a few missed payments into a full-blown foreclosure. So here are a few options for those who want to know their options.
Alternative #1: Short Sale
When you sell your home, you pay off the current mortgage with the buyer’s loan. But what if your home’s value has plummeted below the face amount of your loan? In that case a buyer’s offer wouldn’t even retire your mortgage – much less provide the down payment on a new home. So you’re stuck, right?
Wrong. If you secure a bona fide offer your lender must take it seriously: it must decide whether to hang on to your home and potentially foreclose, or take a “short payoff.” And it turns out that virtually all banks are willing to take a short payoff under the right circumstances. The result is a short sale.
If your lender agrees to the short sale price it will release its mortgage lien – most times without asking you to make up the difference. But to convince the lender, you typically need to list your house for at least 90 days and meet a gauntlet of conditions. To enhance your chances of success, choose the right advisors. Experienced Real Estate Brokers and Attorneys make the process much easier and radically increase your chance of success.
Alternative #2: Deed in Lieu
As the name implies, it is possible to give your lender permission to take your home – that is, tender the deed– instead (“in lieu”) of making the lender foreclose. To qualify for this remedy a homeowner must submit a hardship letter and follow a battery of steps. Note: in order for a deed in lieu to work there cannot be junior liens on the property.
Unlike a short sale, lenders do not take steps to obtain a deficiency judgment when a deed is tendered in lieu of foreclosure. This is a difference and an advantage (in theory) over short sales. But in reality, short sales rarely generate deficiencies anyway.
The deed in lieu also permits the homeowner to avoid the publicity, expense, and time commitment involved in a foreclosure action.
The primary disadvantage of the deed in lieu is that homeowners lose their property, including all equity, immediately. On top of that, both the conveyance of the house to the lender and the forgiveness of the deficiency are taxable events that can generate thousands in unforeseen liability for the homeowner.
Alternative #3: Bankruptcy
Most people think of Bankruptcy as the end of the road: the last stop on the spiral to the bottom. But hold on! Bankruptcy isn’t the deep, dark hole many believe it to be. In fact, when it comes to saving your home, it may just be the best thing that ever happened to a homeowner. Here’s why.
First, Bankruptcy is tax neutral. Unlike all the options above, absolutely no tax liability arises when debts are written off in Bankruptcy.
Second, regardless of the type of Bankruptcy employed – liquidation or reorganization – the result is to stop the foreclosure freight train in its tracks. And if the homeowner can manage to repay what they’re behind, the foreclosure can be stayed indefinitely.
Third, for those who don’t realistically expect to catch up, a liquidation Bankruptcy will relieve them of the mortgage debt permanently, and without causing any unwanted tax repercussions.
In fact, Chapter 13 Reorganization enables homeowners pay down mortgage arrears via a payment plan over as many as 60 months (5 years). During that time, all foreclosure activity is stayed. Homeowners can file for Chapter 13 Bankruptcy relief right up until the confirmation of the Sheriff’s Sale of their home.
Light at the End of the Tunnel
The short list in this post does not even get into the maze of regulations known as HAMP, HARP, and other government programs such as the Reverse Mortgage. These are also possible ways to go about saving your home from foreclosure. To learn more, drop us a line at mhedayat[at]mha-law.com or call for a confidential consultation. We are always happy to be of service.