Alternatives to Foreclosure for Homeowners Facing Foreclosure Who Do Not Qualify for Assistance
The housing legislation passed the House and the Senate and is expected to be signed into law by President Bush very shortly. While that new law may help as many homeowners avoid foreclosure by enabling them to refinance into more affordable government-backed loans, not all homeowners will qualify. Thus, homeowners facing foreclosure should learn about other options like the “short sale” and “deed in lieu of foreclosure” transactions.
The short sale. A borrower sells the house at fair market value, less than the amount owed on the home. The lender in turn usually agrees to forgive the remaining debt. The deed in lieu of foreclosure. The borrower gives the property to the lender with the lender’s consent “in lieu of” waiting for foreclosure. The Lender then sells the home and, as in a short sale, usually agrees to forgive the difference between the amount owed by the borrower and the home’s ultimate re-sale amount.
Neither of these options will keep a homeowner from losing his or her home and/or damage to one’s credit. However, both offer advantages: (1) they allow the homeowner to walk away from their house free of mortgage debt, (2) the homeowners will generally face a shorter waiting period before they can obtain another mortgage.
In contrast, in foreclosure proceedings, the waiting period to obtain another mortgage is at least twice as long and the lenders can pursue the difference owed to them depending on applicable State law. Most lenders do not pursue this debt, but sometimes do.
A homeowner interested in pursuing a short sale or deed in lieu of foreclosure should immediately contact their lender or loan servicer before attempting to sell their home. Both alternatives require the homeowners to provide a “letter of hardship’ to the lender or loan servicer explaining why they cannot pay their mortgage payments. Short sales are considered preferable, because they save lenders the hassle of selling the home. Before undertaking any of these proceedings, homeowners should contact a certified public accountant and/or a tax attorney to determine any potential tax consequences that could result.
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