Last month I wrote about the ability to approach a mortgage lender for a loan modification if you find yourself no longer able to pay your mortgage. But, what if you no longer want to stay in your home - or your lender refuses to modify your loan payments to something you can afford? There are still two options with the potential of saving you from foreclosure.
The first is a ‘deed in lieu of foreclosure.' This, in essence, is asking a lender to take the property back. ‘Asking' is the key word here, because lenders do not have to agree to this proposition. Additionally, a homeowner can't just mail in their keys with a note saying "Dear Bank, I don't want my house anymore, thank you." There is transfer paperwork that must be executed before a lender can legally take back a property. Without this the lender is forced to proceed with foreclosure in order to gain possession and re-sell the property.
When considering a request for a deed in lieu of foreclosure, there is a bank protocol that must be followed. They will want an explanation of why the borrower can no longer afford the property. In addition they will require much of the same income and expense documentation that they require for a loan modification request. While this is a very viable option when there is only one lender, the deed in lieu request becomes more difficult when two lenders are involved. In this case, the second lender will have to agree to take little or no pay off. Without the second's release, even if the first lender is in agreement to take the property back, their hands are tied unless the second agrees.
The second option available when a homeowner finds themselves in a property that they can no longer afford is called a ‘short sale.' A short sale is asking for a lender's permission to sell a property at current market value, even though more is owed than it than its current worth. A short sale can be a lengthy and sometimes frustrating process, but a successful short sale will save a borrowers credit from a foreclosure. A short sale often looks attractive to a lender, especially if foreclosure seems eminent. Foreclosure is a timely and expensive process, and in the end the lender ends up with a property that they don't want and need to sell. Factoring all of the costs, a short sale often provides a better financial outcome for the lender then a foreclosure, even though they may be writing off tens of thousands of dollars.
The majority of lenders will require that there be a contract in hand from a ready, able and qualified buyer before they begin evaluating a short sale request. Their first step will be to order a ‘BPO' (broker's price opinion) or an appraisal. That value opinion, combined with full financial information including; paystubs, bank statements, tax returns and a hardship letter, make up a short sale package. Once all the documentation has been submitted the lender will review the package to see if the offer at hand meets their criteria for short sale acceptance.
While the process itself may like it should move quickly, it rarely does. Bogged down by numerous files, the very best lender will generally take at least 30 days before a decision is made. On average the wait can top 90 days. During that time buyers often lose interest and move on to another property. So, it is advisable to work with a Realtor who specializes in short sales who will work to have back up offers on hand and who will know how to effectively and efficient negotiate with lenders.
Both a deed in lieu of foreclosure and a short sale may have tax and legal ramifications. While the government has stepped in with new laws that assist some property owners, others remain very exposed, so appropriate legal and tax council is advisable before pursuing either option.
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