How can you avoid a foreclosure? Because a foreclosure can ruin your credit for up to 10 years, you may wish to avoid a full foreclosure. But be very careful - foreclosure prevention scams are becoming more common. Make sure you understand the situation before you choose a course of action.
You might be able to avoid the additional costs associated with foreclosure and save your credit by give the lender a Deed in lieu of foreclosure. This is where the borrower simply deeds the property back to the lender without going through the foreclosure process. Lenders are not required to accept this method, but they may be willing to do so in order to save them the time and expense of foreclosing on the property.
Sometimes, it is possible to convince a lender to stop the foreclosure process in order to negotiate a short sale which is a settlement where the lender agrees to release their lien on the property and accept less than the full amount owed on the mortgage. This is also why it is important not to procrastinate.
Or, you may be able to sell the property on the open market before the end of the statutory redemption period. This may involve a short sale when the market value of the property is less than what is owed on the property. The lender may agree to a short sale in order to avoid a loss. Because the lender generally incurs the full cost of the foreclosure (legal fees, upkeep on the property, depreciation, rehabilitation, cost to resell, etc.) I can sometimes convince them to accept a short offer.
In the case of a foreclosure, it is often easier to sell a vacant property. You need to be prepared to move on short notice.
The approval for a short sale may take several months or it may not be approved at all. Some lenders have committees that make the decision and there may also be insurers and other investors involved. If the original mortgage was sold on the secondary market, it may be nearly impossible to get approval for a short sale. Either way, short sales often take quite a bit of negotiating on my part. There are no guarantees that the lender will agree to a short sale. Once you have defaulted on a mortgage, the lender controls the situation and may proceed as they see fit.
One of the conditions of a short sale is that the borrower does not receive any of the proceeds of the sale. Since the lender is going to take a loss they insist that you do not benefit from the sale.
If the lender agrees to full satisfaction of the mortgage via short sale, then they may be tax consequences and you should consult your tax professional in this regard. It is very likely that the lender will issue you a 1099 for the difference between the amount owed and the amount the lender collects after all costs associated with the sale are subtracted. Some lenders may even attempt to get the borrower to sign a promissory note for the remaining amount due.
Lenders are not interested in bailing out borrowers who foolishly overextended themselves. Most of the time, they will require a review of the borrower and only agree to a short sale when there are mitigating circumstances such as a serious illness, layoff, or death. Lenders are not likely to approve a short sale for investors, borrowers with substantial assets, or those who were attempting to flip a home for financial gain.
Your lender will require a review of your financial situation including a written statement explaining your inability to make your mortgage payments. You should also be prepared to provide them with two months' pay stubs, two months' bank statements, your last two tax returns, and possibly other financial information. A delay or denial of a short sale can be caused by the borrower's inability to provide the timely delivery of the documentation necessary for a full financial review.
For more detailed information see parts 1 or 2. You may also contact me for further assistance.
Foreclosure process in Minnesota, Part 1
Foreclosure process in Minnesota, Part 2
Foreclosure process in Minnesota, Part 3
Foreclosures Halted in 23 States
How to Avoid Foreclosure, Part 1
How to Avoid Foreclosure, Part 2
How to Avoid Foreclosure, Part 3
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