Foreclosure Options, Helpful Definitions and Terms - Helpful Definitions and Terms for Foreclosure Options

Real Estate Agent with HomeSmart Elite Group BR546281000

Foreclosure Options, Helpful Definitions and Terms


I wish there was an effective way to get the word out to distressed homeowners about the options that are available.  It was hard to watch our neighbors walk away from their home even after endless attempts to counsel them in regards to options. 

Foreclosure Options, Helpful Definitions and Terms

•1.      FORBEARANCE (Moratorium): The lender could suspend payments from the Borrower for a period of time and readjust the terms of the loan at a later date, or they can add the amount to the back of the loan (prorated amount).

•2.      Deed in Lieu of Foreclosure- Borrower will give the lender deed to the home to avoid foreclosure in exchange for release of obligation to pay further debt. This is commonly known as a "friendly foreclosure" settled by agreement vs. court action. One disadvantage: all junior liens are not eliminated as they are in a foreclosure. The time to negotiate is when a short sale cannot be arranged; but prior to foreclosure date.

•3.      Default: The borrower fails to make payments on the loan and violates the terms on the Deed of Trust. Defaulting on a loan will bring about foreclosure.

•4.      Bankruptcy: Once bankruptcy is filed, no creditor can take action against the debtor outside of the Bankruptcy Court. Any foreclosure action is automatically stayed or delayed while the Bankruptcy is pending. If a foreclosure sale takes place within 1 year before the filing on the bankruptcy, the sale can be voided if the foreclosure sales price is substantially less than the Fair Market Value.

•5.      Tax Consequences: While the Borrower defaulted on the loan and will receive no proceeds from the sale, there may be a taxable gain (phantom income) from the sale which result in a 1099 at the end of the year. Note: The US House of Representatives has introduced the Mortgage Cancellation Tax Relief Act (H.R. 1876), which would eliminate taxes on any debt forgiven on a principle residence through either a short sale or foreclosure.

•6.      Short Sale: A sale of the property that produces less money than is owed to the lender. It can also be called "short pay" .  The lender will release its deed so that the property can be sold free and clear to a new buyer. The lender will agree to negotiate a sale rather than have a delay and expense of a foreclosure, which could end up with the lender owning the asset carrying a "real estate" owned (REO) on its books.   

•7.      Pre-Foreclosure: The period between the borrowers first missed payment, including the Notice Of Intent to foreclosure and concludes when the property goes to auction.


Note:   My helpful definitions and terms are intended as information only. Although we go to great lengths to make sure our information is accurate and useful, we recommend you to consult a legal counsel and a tax professional.

Comments (1)

Lisa Matykiewicz
United Brokers Group - Gilbert, AZ

Thanks for the simple terms...This is great for clients.

Sep 03, 2009 05:12 PM