Archive for Short Sales
Defaulting Homeowners – Issues to Consider
Posted by: | CommentsMillions of homeowners reach the point where they feel they have exhausted every last option. They can no longer make payments on their mortgage, their credit is in tatters, their patience and pride has been worn down by banks that refuse to work with them on a loan modification or short sale strategies that will leave them financially vulnerable.
When it comes down to a choice to either “pay or walk away” more and more homeowners are opting to abandon their homes to the foreclosure process.
If you decide to default on your mortgage and allow the lender to foreclose on the house, the important thing to remember is to avoid any risky behaviors that will have negative consequences for you once you have walked away. This sort of planned foreclosure is called a “strategic default.” Here’s how to protect yourself from prolonged and serious legal consequences:
1. Do know the type of foreclosure you are facing.
Non-judicial foreclosures do not go through the state court system. Essentially, homeowners simply stop paying their mortgage and wait for their lender to institute foreclosure proceedings. Depending on the housing market in their area, banks may be more or less eager to take back a particular property.
I know people who are still living in their homes several years after they have stopped making mortgage payments.
A judicial foreclosure proceeds through the state court system and in states where it is allowed a judgment for the deficiency (between what the house is worth and what you owe on the mortgage) will be rendered against you in a court of law.
In some states, lenders have the ability to sue for the unpaid balance for a period of time ranging from 6 months to 6 years depending on the circumstances. Research whether you live in a “non-recourse” state where lenders can take back the house, but not touch your other collateral or assets to close the gap in what you still owe them.
2. Don’t try to get “revenge” on the lender. No matter how angry you are over the circumstances that have caused you to abandon your home, do not take it out on the house! There are serious legal consequences to destroying a home in foreclosure.
3. Do remember that until the bank forecloses, you are still the owner of the property. Even if you aren’t living in the house, you are the responsible party until lender legally takes possession.When you leave, be sure to leave the house in good condition. Do a walk-through and make sure everything is okay. Take pictures that show the home is in good condition.
Keep your liability insurance current—remember, if someone is injured on the property, you are still the owner of record.
If you continue to live in the area, do occasional drive-bys. Make sure the house has not been broken in to or vandalized. Even if you are angry with your mortgage holder, try to have some compassion for your neighbors. Homes that have been foreclosed devalue the entire neighborhood; homes that have been foreclosed and are in bad repair drop everyone’s property values even more.
4. Do have a responsible plan for the future. Get a strong financial plan in place that will let you use the money formerly put toward your mortgage payments to regain stability.Rent a home if the rent is less than your monthly mortgage (otherwise, why leave the home at all?)
Know that your credit score will suffer moderate to severe negative impact depending on the circumstances around your decision to allow foreclosure.
Remind yourself that bad credit is a relatively short-term outcome (from 1 to 10 yeas) and be prepared to work to repair yours. Avoid other offers that entice you to live beyond your current means. After all, wasn’t it “easy credit” that got you into this situation in the first place?
In all of the solutions for getting out from an underwater housing situation, you must force the lender to come to you. You cannot count on parity, equality, good faith—you can’t count on any promises—on the part of the lender.
The fact is, you took their money on their terms and now they are entitled to take your money every month, change your interest, take or sell your house.
Homeowners in trouble need to be smart about their options to walk away, it’s the only way to maintain the possibility of ever gaining back their piece of the American Dream. Therefore, contact a reputable real estate attorney in your area for legal advice before making any rash decisions.
Should Borrower Just Walk Away From a Vacation Home?
Posted by: | CommentsA borrower who owes more on a Florida vacation condo than it’s worth wonders if foreclosure is the best option vs. a short sale.
Question: I am going through a short sale process right now for my condo in Sarasota, Florida. I bought the property in 2005 and was moved by my employer to California a few months ago. Therefore, I have no use for the place now, and cannot afford the monthly mortgage payments, maintenance fees, taxes and general upkeep.
There is a 1st and 2nd mortgage on the property: One is owed about $350,000, and the second lien holder is about $50,000. According to a recent CMA/Appraisal, the property is now only worth $290,000. Both of the lien holders are going to submit 1099C forms to the IRS. That will result in me paying taxes on about $110,000! If I walk away and they foreclose, do I need to pay anything? I don’t care much about my credit record at this point! Can the lien holders come after me after a foreclosure?
Answer: Definitely stick with the short sale. In either case, since this is considered an “investment property” or “second home” by the IRS and not your primary residence, you’ll be on the hook for taxes on the shortfall between the final sales price and the amount owed on the mortgages. Plus with a foreclosure, if you personally signed on the note, the lenders won’t forgive your debt without first trying to collect the shortfall from you, according to a local real estate attorney that I recently spoke with.
Unfortunately, investors like you who bought a second home at the top of the market and have seen it drop in value get no relief from the federal government since this is not your primary residence. The IRS counts debt forgiveness – the difference between the home’s sale price and the amount owed on the mortgage(s) – as regular income, although there are exceptions for bankruptcy, insolvency, forgiven deductible mortgage interest and seller-financed debt. You also cannot deduct losses from price declines or expenses you incur for real estate brokers, attorneys or others involved in the sale. Primary homeowners, however, get a break from being taxed on the shortfall, at least until December 31, 2012, thanks to the Mortgage Forgiveness Debt Relief Act of 2007.
Unfortunately, you are stuck, although the short sale does have several advantages over the foreclosure. Some lenders don’t report short sales to credit bureaus, or report them as “paid as agreed”; and even if they do, you’ll likely have a lighter hit to your credit score than if you had a foreclosure. If you buy a home again in California, the loan application will ask if you have ever had a foreclosure; it won’t ask about a short sale. Moreover, under Fannie Mae guidelines, if you have a short sale and have been current on your payments, you may qualify to buy another home immediately; or within two years if you were in arrears. However, if you go through a foreclosure, the wait is 7 years.
But perhaps you have other options. You mention that you were moved by your employer, so I assume you are receiving the same salary that you had when you bought your Florida condo four years ago. You also state that you can no longer afford payments, but don’t explain why. Unless you’ve suffered a setback like a medical emergency, or you have a co-signer on the loan(s) who is now unemployed or has died, I don’t understand why your lender would accept your hardship letter and approve a short sale. Generally, you must prove a hardship in order to qualify for a short sale. With some lenders there are exceptions, but very few.
Lenders don’t consider not being able to use a place as sufficient reason to grant a short sale; after all, you can always rent the place out until prices improve. If your financial circumstances haven’t changed, and you truly can afford this condo, I suggest that you do that, even if the rent doesn’t cover all of your expenses. It’s a much better alternative than having your credit ruined, or exposing yourself to prosecution for fraud.
