Four Strategies to Avoid Foreclosure
February 20th, 2009 Posted in Real Estate
Even if you have to give up your home due to factors out of your control — declining market, loss of employment, divorce — there are five strategies to avoid foreclosure.
The main reason for not letting your home be foreclosed upon is to minimize your loss and liability. Foreclosure will increase your short, medium and long-term loss, liability and hardship.
- Short Sale
A short sale is selling your home for less than what is owed on all of your mortgage balances, plus the cost of the sale; ie, real estate agent commissions and closing costs. The first step is to contact a Foreclosure Specialist to evaluate what your home is worth and to discuss whether you have a valid hardship. Once the home is listed for sale and you receive offers, those offers will be sent to the lender(s), and they will decide whether they are willing to accept the highest offer submitted.
If the lender accepts an offer, there are a couple of different ways they might address the shortage of funds.
- The first is to require you to sign a promissory note to pay the deficiency back, and they would require this before close of escrow.
- The second is to pursue a judgment, but that would be based on whether you have a recourse or non-recourse loan.
- The third is that they may report the loss to the IRS, and then you might receive a 1099 reflecting the amount of money that was deficient in the sale which would be reported as earned income on your income taxes.
However, if the cancelled debt amount is considered ”qualified principal residence indebtedness” pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, there will be no taxation on this forgiveness of debt (cancellation of debt) income.
The following is courtesy of the California Association of Realtors website:
“This forgiveness or cancellation of debt which is treated as “ordinary income” under certain circumstances may or may not be subject to taxation. Under the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) signed by the President on December 20, 2007, Internal Revenue Code §108(a)(1)(E) was added and provides that a taxpayer will not be taxed upon cancellation of debt income if the following conditions are met:
. The property sold in the short sale is the taxpayer’s principal residence, as that term is used in IRC §121.
. The cancellation of debt is Qualified Principal Residence Indebtedness** under IRC Section 163(h)(3)(B).
. The indebtedness is discharged after January 1, 2007 and before January 1, 2013. (The end date was increased by three years from 2010 to 2013 pursuant to H.R. 1424, the Emergency Economic Stabilization Act of 2008).
**Qualified Principal Residence Indebtedness is a loan secured by the residence used to acquire, construct or substantially improve the residence. The income relief provided is capped at $1,000,000 in the case of a married person filing a separate return and $2,000,000 for all others.”
Seek the assistance of a tax professional to find out whether this cancellation of debt will be taxable income on your behalf; ie, Certified Public Accountant, tax attorney or income tax preparer.
2. Sale with Equity
Here you need to determine if you would have any equity left after paying off your mortgages and the cost of sale, and you once again need a real estate professional to provide you a current Comparative Market Analysis and advice to help you come up with a market value. If you need to sell your home for whatever reason, you will most likely list it with a real estate company.
Based on feedback from other REALTORS(R) and feedback from prospective buyers, you may have to adjust your price according because of the declining market. There may come a time when your asking price plus cost of sale dips down below what your loan balance(s) is which would put you in a short sale situation as the market determines sales price.
If you think there is even a slight chance that you will end up in a short sale situation, make sure you hire a qualified REALTOR(R) to help you out.
3. Loan Modification
A loan modification is an agreement between the borrower and the mortgage company that either temporarily or permanently changes one or more terms of the note to make the payments more affordable. If you can achieve a substantially reduced mortgage payment, this could be the option that allows you to stay in your home. Common loan modifications include:
- Adding any missed payments to the existing loan balance
- Changing an existing adjustable rate mortgage to a fixed rate mortgage
- Temporarily or permanently reducing your interest rate
- Extending the term of the note
Also, with the signing of the Economic Stimulus package this week, soon there will be new programs with lenders to facilitate loan modifications if you fall within certain guidelines that have yet to be disclosed.
4. Deed in Lieu of Foreclosure
This instrument conveys all of your interest in the property back to the lender in order to satisfy the loan and avoid foreclosure. You voluntarily transfer title to the lender in exchange for excusing the remainder of the debt owed.
The lender may consider a Deed in Lieu of Foreclosure under the following circumstances:
- The borrower is unable to sell the home.
- Foreclosure is forthcoming and unavoidable.
- The property needs to be left in very clean condition to accelerate resale by the lender.
- There are no other liens on the property other than the first lien.
- You are still living in the home.
5. Selling on Assumption
An assumption allows a qualified buyer to take over your existing loan, including terms. Two basic types of assumptions are assumable and non-assumable.
- Assumable allows a buyer to assume the loan without qualifying. I don’t know of any lender allowing this at this time in California.
- Non-assumable loans allow the buyer to assume, but the buyer must qualify. There are loans that don’t allow either.
Look at your loan documents under “subject to transfer” to find out whether your loan is assumable. Most likely, it is not.
Beware of scam artists who offer to assume your home loan.
Professionals that might assist you in deciding which option you want to pursue to avoid foreclosure would be:
- Certified Public Accountant
- Attorney
- REALTOR(R)/Certified Foreclosure Specialist
- Loan Redemption Specialist
- Credit Repair Company
If you would like to search the MLS for listings in and around Paso Robles, visit my website. If you have any real estate questions or general questions about Paso Robles or San Luis Obispo North County, please contact me via email or call me at (805) 235-0234 for more information.
It starts with a dream…
Tags: comparative market analysis, declining market, Deed in Lieu of Foreclosure, loan modification, paso robles, promissory note, short sale