Thanks to my wonderful and talented video producer husband, I’ve just launched the first in a series of short videos designed to help educate consumers on a variety of real estate topics.

The first in the series discusses your 8 options if you can’t pay your mortgage. Would love to hear your comments!

And please don’t hesitate to contact me for a free, confidential consultation. 619-846-9249.

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Short sales can be a real pain for everyone involved…sellers, Realtors, buyers…and because so many fail, people are often left with a negative view of the short sale process.  But, do you really know the benefits that might make it worth the effort?

As I’ve mentioned before, I work with an exceptional short sale negotiation company that has a 99% success rate in getting approvals.  The president of that company recently put together a nice chart outlining the benefits of a short sale vs. a foreclosure and I’ll share the highlights.

Future Ability to Purchase a Home:    When you apply for a home loan, there is a question on the application that asks, “Have you had a property foreclosed upon or given title or deed-in-lieu thereof in the last 7 years?”  A positive response may impact your ability to qualify and will certainly influence the interest rate you are charged.  Currently, there is no question on the loan application with regard to short sales.

Impact on Credit Score:    With a foreclosure, credit scores can drop 250 – 300 points.  Conversely, with a short sale only late payments will impact the credit score.  After a short sale, the mortgage that was paid-off short will be reported as ‘paid as agreed’, ‘negotiated’, or ‘settled for less than agreed’.  This can lower your score as little as 50 points and will usually have little to no effect in twelve to eighteen months.

Impact on Credit History:   Foreclosure remains on your credit history for seven years.  Since short sales are not specifically reported their impact is only as great as the number of missed payments, as noted above.

Deficiency Judgment:  Unless you’re in a state with anti-deficiency laws, the bank can pursue a deficiency judgment.  In a successful short sale, the bank will waive the right to pursue a deficiency judgment.

Current and Future Employment and Security Clearance:   Many employers require credit checks for all employees, and certainly for anyone hoping to attain a security clearance.  While individual companies and agencies have different requirements, a foreclosure can have a negative impact on your ability to get a job, keep your job, or get certain clearances.

Of course I’m not a lawyer or accountant, and each individual’s situation is different, and not everyone will qualify for a short sale.  You should always consult the appropriate professional for advice.  But as a real estate professional, I would definitely give the short sale serious consideration before deciding to just walk away.  For a confidential consultation just give me a call at 619-846-9249.

It’s no secret that the government’s short sale program, HAFA, has had less than stellar results.  The Home Affordable Foreclosure Alternative program was started in April 2010 to provide alternatives to foreclosure when a loan modification wouldn’t work.  Through September, the program has processed only 342 short sales or deed-in-lieu transactions.  This number is ridiculously low considering that third-party technology provider Equator, who provides the platform for processing short sales for several banks, including B of A, reports that over 117,000 HAFA short sales were initiated in the period from April – October.   What happened to all of those transactions?

Mortgage servicers and Realtors have complained about the confusing rules and the stringent requirements for participation that have made it difficult to complete a transaction.  In December the California Association of Realtors sent a letter to government regulators complaining about the program and requesting specific changes to expedite approvals.  The government responded quickly and issed a directive on December 28 that made some significant changes to the program.  Here are a few of the highlights:

  • Servicers are no longer required to verify that an applicant’s mortgage payment exceeds 31% of their gross income, although a hardship must still be demonstrated.
  • Applicants do not need to be currently living in the home so long as it was their principal residence in the last 12 months.
  • Payments to subordinate lien holders are no longer capped at 6%, but have an aggregate cap of $6,000.
  • Servicers participating in the HAFA program will be required to either approve, disapprove or provide a counter to any complete short sale application and purchase offer within 30 days.
  • Servicers who pay contractors to assist in processing the short sale cannot charge those fees to the borrower or deduct it from the real estate commissions.

Will these changes improve the approval rate?  Probably, but the key will lie in how well the banks comply and the rules are enforced.

First and foremost, don’t ignore the problem.   Chances are you won’t win the lottery, and your financial troubles are real.  As soon as you are 30 days late on your payment, the lender’s clock starts ticking.  There is help and you have several options.  Take a deep breath and try to look at the situation objectively.  Pick up the phone and talk to your lender.  Just remember that time is of the essence.  Acting early allows you to make the decision that is best for you.  Wait too long and your choices disappear.

Do Nothing.  It is likely the lender(s) will foreclose.  Foreclosure information will stay on your credit report for up to 7 years and may make it difficult to buy again for at least 3-5 years.

Refinance.  This is only a viable option if there is equity in your home.

Reinstatement.  This option means that you will have to pay all delinquent amounts due plus interest, attorney fees, late fees, and taxes and insurance if impounded.  If withdrawing funds from a retirement account you should consult a tax advisor.  If borrowing from friends or family make sure that all terms are in writing and that you can afford the re-payment plan. 

Loan Modification.  A loan modification re-writes your existing loan to make the monthly payments more manageable by reducing the interest rate, extending the term, and/or reducing the principal amount owed.  Your lender may participate in the government’s Home Affordable Modification Program (HAMP), which provides incentives for lenders to modify loans.  This program and loan modifications in general have limited success.  Please read my blog post dated 10/27/2010. 

Forbearance.  In a forbearance agreement your lender arranges a repayment plan that spreads out the defaulted amounts due over an extended period of time.  It may include temporary payment reductions.  You will need to supply information that shows your financial problems are temporary and you will be able to meet the repayment requirements.

Deed in Lieu of Foreclosure.   You voluntarily sign the deed back to the bank and vacate the home instead of the bank foreclosing.  Slightly better on your credit report than a foreclosure.

Bankruptcy.  Consult a bankruptcy attorney.  Filing Chapter 7 for liquidation of debt may stall foreclosure, but your lender may be allowed to resume proceedings.  Chapter 13 may halt foreclosure, but the debt of the past due amounts will be included in a 3-5 year re-payment plan. 

Short Sale.   If your home has equity, you may sell the home without lender approval.  Lacking equity, you can opt to sell the home for less than the amount owed.  This is negotiated with your lender by a qualified Real Estate Professional.  In a short sale the lender must agree to accept less than the amount of the debt owed.  This option is more favorably reported on your credit report. 

Other alternatives.  You might want to consider renting a room in your home, or getting a second job.  If you own a small business, you might qualify for an interest-free America’s Recovery Capital (ARC) loan of up to $35,000 from the Small Business Administration.  Also, if there are discrepancies in your loan documents or foreclosure paperwork, you may be able to sue your lender.  To pursue this option, consult an attorney specializing in forensic real estate work.

The most important thing you can do is not bury your head in the sand.  When a homeowner calls and tells me their home is going to auction in 5 days, there is little that can be done.  Be realistic about your financial situation.  Put it all down on paper and know exactly what you can afford today and your anticipated income over the next year.  By taking control of the situation versus letting your lender direct the action, I guarantee you will have a less stressful, healthier outcome.

Please call for a confidential, no-obligation consultation if you’d like to discuss any of these options and how they might work for  you.  To reach me quickly please call my cell phone:  619-846-9249 .  Or, leave a reply and let me know how to reach you.