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None of us want to go through the difficult decision to either surrender a home or try to keep it.  However, when faced with the possibility of losing your home, it's important to understand the options available in order to make the most informed decision that results in the least legal ramifications and best financial outcome.

Short-Sales

Short-sales are an option when a homeowner is unable to pay mortgage payments based on the current terms as set forth in the mortgage agreement by the bank or lending institution.  A short-sale occurs when the homeowner, with prior official approval, from the lender, sells the home for less than the pay-off amount or amount owed at the time of the sale.

Reasons to Consider Short-Selling

Usually a short-sale is the best alternative when the borrower/homeowner is unable to keep the home.  It shortens the waiting period to buy another home by 5-7 years.  This means that under certain guidelines as set forth by a new lender for a new home, the borrower may be able to purchase a home immediately following a short-sale of their current home.  Otherwise, the typical maximum period is about 2 years following the short sale opposed to 5-7 years following a foreclosure. The credit ramifications following a short sale are primarily based on the missed payments over the course of the delinquency up-to the closing of the home rather than automatic point reductions as in foreclosures.  While there are extensive time constraints and buyer assumed closing costs, the overall savings is typically considerable, making the home desirable to investors and experienced short-sale home buyers.  

Drawbacks of Short Sales

The process to sell your home by way of a short sale is lengthy and requires a considerable amount of paperwork.  The seller is still responsible for locating the buyer and the buyer is typically responsible for numerous repairs and closing costs typically assigned to the seller.  While there are a great deal of savings for the buyer, the multiple approvals at the bank level, time constraints and possible repairs can make short-sales less desirable, especially for first-time home buyers.  This decreases the buyer pool for the home and therefore can also cause a delay in the home sale.  The overall process can take 3-12 months.  The longer the process, the more extensive ramifications to the homeowner's credit report based on the number of missed payments over the course of the delinquency and short-sale process.


Foreclosures

Foreclosures result when a homeowner is unable to pay mortgage payments based on the current terms as set forth in the mortgage agreement by the bank or lending institution.  It's the least desirable alternative when a homeowner is unable to keep up on the mortgage payments.  The other alternatives include short-sale, forbearance and/or loan modifications (see our June Article "Alternatives to Foreclosure").  Foreclosure begins after 3-6 months of delinquent mortgage payments.  The Notice of Default is issued and recorded with the County Recorder's office.  It can also be referred to as a Letter of Intent, Acceleration Notice or Demand Letter.  It basically lets the homeowner know they can settle the mortgage with a short-sale or by paying the total amount due on the loan.  This does not necessarily mean that alternatives to foreclosure or short sale are not possible at this stage of the pre-foreclosure process.  Most lenders would prefer not to assume ownership of a home through foreclosure.  However, the process will take place if no other arrangements are agreed upon by both parties. 

After the homeowner has vacated the home or been evicted and appropriate legal notices are published, the home will initially be auctioned.  The buyer usually buys the home for cash, sight unseen and assumes the home in as-is condition, with no expressed warranties.  The buyer will also assume any and all title defects, encumbrances, liens to include, but not limited to: the primary lien, additional home equity loans or lines of credit, etc.  It's a risky purchase which results in numerous homes not selling during this initial auction process. 

The home is then a bank owned property also known as REO (real estate owned).  While the homeowner is no longer in possession of the home, in many states the deficiency (the difference between the amount owed and the final sale amount) is still the responsibility of the homeowner unless discharged in a bankruptcy or otherwise negotiated.  So, the longer the bank holds the property, the larger the loss is to the homeowner.  Maintenance, repairs, fees or taxes assumed by the bank may also be charged to the homeowner. 

If there is a surplus following the sale of the home, the bank is required to return the overage minus expenses to the previous owner.  It's best to hire an attorney on your behalf to maintain communication with the bank's trustee in either case of deficiency or surplus.  The typical time period to buy another home is 5-7 years (conventional) or 3-7 years with extenuating circumstances as determined by the lending guidelines and/or type of loan.  According to Barry Paperno, Consumer Operations Manager at FICO, formerly known as Fair, Isaac and Company, a data analytics firm that concentrates on credit score services, the homeowner's FICO score automatically drops 100 points when a foreclosure occurs.  Also, the homeowner will likely be liable for income taxes for any loss incurred that is not payed back to the mortgagor. 

Reasons to Consider Foreclosure

The process of foreclosure is typically quicker than the short-sale process.  If the home has enough equity, the overage following home sale costs and otherwise will be returned to the homeowner.  In some states, the banks will not sue for the deficiency or loss on the property.  While there is a considerable amount of time to be unable to buy another home through a conventional loan, it may be possible to qualify for a FHA loan in as little as 3 years.

Drawbacks of Foreclosure

There are many alternatives to foreclosure that make it a last option when delinquent on your mortgage.  The damage to the homeowner's credit and home loan worthiness present great obstacles to immediate housing following the process.  Not only will you be unable to buy another home right away, but with credit damage it may be difficult to get approved for rentals as well.  Furthermore, the drastic credit score drop will likely cause current creditors to raise interest rates, decrease credit limits.  Utility companies may require co-signors and/or deposits when you move to a new residence.  You may also have an increase in auto insurance premiums or difficulty getting approval for renter's insurance.  A low credit score can also hinder your ability to get new employment. 

While the process takes less time, the drawbacks give the homeowner less time to find new housing during the pre-forclosure period.  It's a difficult process that is emotionally overwhelming especially when combined with other hardships such as divorce or job loss which often times are the precipitating event(s) leading to such a loss.         -OurDMK.com


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