There are many solutions available to homeowners falling behind on their payments. Most people think Bankruptcy as the only option, short of just letting the Bank take the home. Bankruptcy is a good option, and while it can strip off the second trust deed if the home is upside down in current value, bankruptcy cannot change the terms of payment on the first mortgage. Frequently, home owners in this situation will use a combination of strategies including bankruptcy to strip all secondary liens, modify the terms of the first, and convert the adjustable to an affordable fixed loan.
Some lenders offer workout options. Others want you to “catch up” all the missed payments first. A few major banks have sent out letters to their borrowers, offering to modify and lower the loan balance if you meet certain qualifications. However, in instances where you do not qualify for a loan modification, the home owner should definitely consider a “Short Sale”.
Short Sale Facts.
If you are facing foreclosure, a short sale can be a beneficial alternative. It is an agreement with your bank or mortgage company, allowing you to sell the property for an amount less than what you owe. Usually, the bank requires an appraisal, and will accept an offer that’s relative to the current fair market value. Unfortunately, the seller (current home owner) cannot also be the new buyer.
What are the advantages of a short sale vs. foreclosure?
The main advantage of a short sale is preventing foreclosure and the consequences that foreclosure incorporates. Short sales are considerably less damaging on credit ratings than foreclosures. Remaining on your report for up to 7 to 10 years, a foreclosure is often times more damaging than a bankruptcy, (unless it’s included in a bankruptcy), and may take you 3 years or more to re-qualify for a new home loan. While Short sales may be reported to the credit bureaus, they are noted as “paid in full” or “settled for less than owed” and have far lesser effect on fico scores.
2013 is a great year to complete a short sale, and get out of a property that is “under water”. Because a short sale allows the homeowner to sell their property for less than the outstanding mortgage debt, it creates a “deficiency”, written off as a “forgiveness of debt” by the lender. In years past, debt forgiveness was considered taxable income. The lender would send out a 1099. Imagine adding $200,000 to your regular taxable income!
However, for 2012 and 2013, the federal government has given us a pass on debt forgiveness taxable income on short sales. However, it is wildly expected to end in 2013. (Please note, this column does not provide tax advice. Always seek advice from a tax professional, when considering tax ramifications in property sales)
Short Sale Summary.
- You can buy a home again in as little as 12-18 months.
- Under Mortgage cancellation Tax Relief Act of 2007 (H.R. 3648) Forgiven debt may NOT be taxed.
- Get more time in your home, and avoid the threat of immediate eviction pending a short sale process.
- Permanent tax free debt relief.
- It usually takes 1-4 months to complete a short sale; you may remain in your home during this time.
- May qualify for Government relocation assistance – up to $3000.00.
- What is a Loan Modification?
Loan Modification Facts.
A Loan Modification is usually a conversion from an adjustable (and uncontrollable) to a fixed interest loan. It could also involve changes to one or more of the following: Interest Rate; Principal Balance and even forbearance on penalties. It also should bring the account current, creating a fresh start for the borrower. There are many reasons for seeking a Loan Modification, however not everyone can qualify. Most Lenders will tell consumers they do not qualify, or deny the first attempt in order to collect the full amount due.
A loan modification will take the mortgage you now have and change the interest rate, terms or payment requirements in order to convert to a fixed rate. Changes in rates and payments do not require new closing costs, legal fees, survey, appraisal, or taxes. In contrast, if you “refinance” a loan you’ll be required to have a closing and be forced to pay a variety of fees and taxes.
If you are facing the dilemma of owing more than the property is worth, or you cannot afford your mortgage payments, give us a call. Let’s see what our office can do for you.
Some people try this on their own, but get lost in the system and end up with an unnecessary eviction instead of a workout. That’s why a lawyer makes a difference. A legal review of your situation will quickly enable you to make an informed decision, and prevent losing valuable time pursuing the wrong course of action. Knowing your options and having choices, could make the difference between keeping your home or losing it.
Call the Law Offices of Paul M. Allen and get the legal advice you need. Two locations to serve you. Glendale 818-334-5445, Cerritos 562-356-9931. Consultations are free, but it is by appointment only.
(This article is for information purposes only, and does not necessary reflect the company’s opinions and views on general issues. We make no warranty, prediction nor representation, nor do we assume any legal liability for the completeness of any information and its effect on any case. Each case is different and results depend on the facts of each case. Consult with and retain counsel of your own choice if you need legal advice.)