The Mortgage Forgiveness Debt Relief Act of 2007 is Expiring

So what are other homeowners doing? Many homeowners that are considering a short sale or a loan modification have decided that instead of waiting for the market to come back they are opting to sell their house now and get out while the getting is good!  If you owe more than your house is worth, it will take years to break even. If you decide to sell your house BEFORE you break even, there will be debt that is settled by the lender. Pursuit of a short sale AFTER this deadline expires will be subject to additional tax liability.

photo credit: russteaches

The current U.S. housing market and national financial crisis has caused untold stress and heartache for many American families. Foreclosure is one of the most devastating financial challenges that a family can face and one that many times can be avoided. The options available to Denver-area residents for foreclosure are many. Following is a brief explanation of these solutions, including their benefits and drawbacks:

Reinstatement
A reinstatement is the simplest solution for a foreclosure, however it is often the most difficult. The homeowner simply requests the total amount owed to the mortgage company to date and pays it. This solution does not require the lender's approval and will 'reinstate' a mortgage up to the day before the final foreclosure sale.

• Benefit: Does not require the mortgage company or lender's approval.
• Drawback: Requires that a homeowner be able to pay all back payments, fines and fees.

Forbearance or Repayment Plan
A forbearance or repayment plan involves the homeowner negotiating with the mortgage company to allow them to repay back payments over a period of time. The homeowner typically makes their current mortgage payment in addition to a portion of the back payments they owe.

• Benefit: Allows the homeowner to make back payments over time.
• Drawback: Requires that a homeowner be in a financial position to pay not only their current mortgage, but also a portion of the back payments owed. Some mortgage companies will require a homeowner to 'qualify' for forbearance.

Mortgage Modification
A mortgage modification involves the reduction of one of the following: the interest rate on the loan, the principal balance of the loan, the term of the loan, or any combination of these. These typically result in a lower payment to the homeowner and a more affordable mortgage.

• Benefit: Reduces the payment a homeowner is required to make on a monthly basis and may reduce the principal balance of the loan
• Drawback: Requires that a homeowner 'qualify' for the new payment and will often require full documentation. Lender has to be actively pursuing modifications.

Rent the Property
A homeowner who has a mortgage payment low enough that market rent will allow it to be paid, is able to convert their property to a rental and use the rental income to pay the mortgage.

• Benefit: Allows homeowner to keep property indefinitely.
• Drawback: The issues that can arise with a rental property are many, and rent often does not cover the full cost of property ownership and maintenance.

Deed in Lieu of Foreclosure
Also known as a 'friendly foreclosure', a deed in lieu allows the homeowner to return the property to the lender rather than go through the foreclosure process. Lender approval is required for this option, and the homeowner must also vacate the property.

• Benefit: Many times in a successful deed in lieu, the lender will forego their right to a deficiency judgment.
• Drawback: Requires that a homeowner vacate the property, and a deed in lieu may be reported to credit bureaus as a foreclosure.

Bankruptcy
Many have considered and marketed bankruptcy as a 'foreclosure solution,' but this is only true in some states and situations. If the homeowner has non-mortgage debts that cause a shortfall of paying their mortgage payments and a personal bankruptcy will eliminate these debts, this may be a viable solution.

• Benefit: Does not require lender approval.
• Drawback: If a homeowner cannot afford their mortgage payment, a bankruptcy will only stall-not stop-the foreclosure process. Bankruptcy can be costly, is damaging to credit scores, and can only be declared once every seven years.

Refinance
If a homeowner has sufficient equity in their property and their credit is still in good standing, they may be able to refinance their mortgage.

• Benefit: In some cases, this will lower payments.
• Drawback: In today's market, a refinance will almost always raise mortgage payments, and is an expensive process.

Servicemembers Civil Relief Act (military personnel only)
If a member of the military is experiencing financial distress due to deployment, and that person can show that their debt was entered into prior to deployment, they may qualify for relief under the Servicemembers Civil Relief Act. The American Bar Association has a network of attorneys that will work with servicemembers in relation to qualifying for this relief.

• Benefit: If qualified, this will lower payments on all consumer debt in addition to mortgage payments.
• Drawback: Must be active military to qualify.

Sell the Property
Homeowners with sufficient equity can list their property with a qualified agent that understands the foreclosure process in their area.

• Benefit: Allows homeowner to avoid foreclosure and harvest some of their equity.
• Drawback: In many cases today, homeowners do not have sufficient equity to sell their property without negotiating a short sale (see next solution).

Short Sale
If a homeowner owes more on their property than it is currently worth, then they can hire a qualified real estate agent to market and sell their property through the negotiation of a short sale with their lender. This typically requires the property to be on the market and the homeowner must have a financial hardship to qualify. Hardship can be simply defined as a material change in the financial stability of the homeowner between the date of the home purchase and the date of the short sale negotiation. Acceptable hardships include but are not limited to: mortgage payment increase, job loss, divorce, excessive debt, forced or unplanned relocation, and more.

• Benefit: A short sale allows the homeowner to avoid foreclosure and salvage some of their credit rating. This also keeps foreclosure off the individual's public record, and in many cases will allow the homeowner to avoid a deficiency judgment. Borrower may qualify for another mortgage in as little as 24 months (as opposed to five years for a foreclosure).
• Drawback: Short sales can be a trying process in which a homeowner is best served by contracting with a qualified real estate agent to guide the way.

This represents only a summary of some of the solutions available to homeowners facing foreclosure. Please call me today for a free confidential evaluation of your individual situation, property value, and possible options

Save money by purchasing a distressed property

You can save money on your new home purchase if you buy a home that is bank-owned, an REO or a short sale. There are advantages and disadvantages to each. These are the things you should consider when thinking about buying a distressed proprety.

Bank-owned (Real Estate Owned - REO)

Bank-owned homes are properties that banks have acquired through the foreclosure property. Because banks lose money everyday that the home is on the market these properties are usually priced to sell, sometimes even below market value - therefore buyers can gain some instant equity by buying bank-owned homes. One thing to be careful about is the condition of the home. Some sellers are not able to properly maintain their home due to their tight financial situation so the condition of the home may not be as good as other homes on the market. When sellers are forced to move out they may not take care while doing so and leave the property in worse condition as well. Banks typically sell the home "as-is" so you may not get any additional help money to help with repairs. While the condition may turn off some buyers, it may also create an opportunity to earn some sweat-equity. If you do an inspection and find that the repairs needed are within your scope of work, you might be able to do the work yourself and earn some equity right after you aquire the property.

Short Sale

A short sale situation is created when the seller owes more than the market value of their home. In order for them to sell their home they need the bank to agree to accept less than what is owed. Banks do not want to go through foreclosure proceedings because it is costly for them. They would prefer to sell the home in a short sale, because in the long run it is less costly for them. This can sometimes create an opportunity for a buyer to obtain the property for less than the market value. The disadvantage of a short sale is that the buyer doesn't know how long it will take for the bank to approve the short sale, which could be anywhere between 30-120 days and sometimes even longer. And the bank may not approve the short sale after all that waiting. If the buyer is in a hurry to move they may not be able to wait for the banks response. If the buyer is able to wait it may payoff because short sale homes are typically better cared for and in better condition than homes that have been foreclosed, or bank-owned properties. 

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