Help – I am drowning in mortgage debt – what can I do?

As the recovery for the real estate industry drags on, more and more homeowners are finding that they are seriously underwater with their mortgage.  Meaning there is a significant difference between what they owe and the current market value of their home.  This is a heavy burden on their financial stability.  For some people it has been made worse by loss of employment or reduction income.  It’s been stated that there are 11 million homeowners under water, 3.5 million behind on payments, and 1.5 million already into the foreclosure process (according to RealtyTrac).

What can be done to stop the hemorrhaging of the finances and avoiding foreclosure? 

One of the first steps many people try is to refinance.  With interest rates at an all time low, if they have enough equity in their house and have maintained their credit, a bank may refinance their loan.  If they do not have enough equity, they can try a loan modification with their current lender.  It is worth a try, however, I have known very few people who have had success with this.   Before leaving this option look into government programs such as www.makinghomesaffordable.gov.

Should they just stop paying and walk away? 

No matter what this is called, deed in lieu of foreclosure, strategic default, foreclosure or cash for keys, the bottom line is the same.  There is a default on the loan (a contract) that has major negative implications for the financial picture as well.  Some people see this as a business decision, which is whether to walk away, as oppose to waiting for the bank to take action.

Is there any other way out?

There is another option, not quite as painful financially, “Short-Sale” the house, that is selling the house at or below market value, which is less than is owed to the bank.  A short sale may also be necessary if by the time closing cost to sell are included, there would not be enough to pay the bank and close. A short-sale requires the seller’s lender to approve the sale, as the lender accepts the net proceeds from the sale as a compromised settlement and releases the lien.  In other words, they have to approve the fact they are not receiving the full amount owed to them.

What are some advantages of a Short-Sale over a foreclosure? 

First, a foreclosure (or even a bankruptcy) could have a greater negative impact on their credit.  In some states the lender will come after the deficiency judgment in a foreclosure.  Recovery from a foreclosure or bankruptcy could take 7-10 years.  With a short-sale, financial recovery could be 2 years.  Also, with a short-sale the agent/negotiator works to obtain a full release of the deficiency at closing.  With the Mortgage Debt Relief Act of 2007, sellers  do not have to pay tax if the home has been their primary residence prior to 2012. (Hopefully this act will be extended.)  However, if the property is an investment property, there may be tax ramifications.  Unless the seller can demonstrate that they are technically insolvent (debts exceed assets).  Be sure to discuss this with an accountant.  Strategic defaults – owner initiated foreclosures – may carry with it added penalties. 

With a short-sale the seller can stay in their home, until it goes to settlement/closing.  Or they may choose to move on to another home.  The homeowner decides which works better for them. The choice is theirs not the banks.  Also, if they are in the process of short-sale, the bank may put off the foreclosure during the short sale.

What types of financial situations would the bank allow a short sale?

The homeowner needs to be in a “financial hardship.”  This would mean an inability to pay due to a variety of hardships:  Marriage (divorce or separation or death of a spouse), Major Medical illness and expenses, Move for employment, Maintenance – where the repairs are serious and extensive, and Money – loss of employment or income, or financial insolvency.  I have seen where many people who may seem fine financially be able to make a case for financial hardship.

How long does it take to go through the short-sale process?

Once there is a ratified sales contract for the house, it may be as little as 3 months or it could take as long as a year.  This depends on the bank’s backlog as well as the competency of the real estate agent in working short-sales.

How to begin?

Contact an experienced real estate agent, to list and market the property at a competitive market price.  The experienced agent will contact the bank to obtain their short-sale package, so that the seller can begin gathering the required data.  The sooner a homeowner begins the sooner they can move through this phase of their life, and begin again. 

Contact us today, to find out how we can assist you with this process.