What is Foreclosure?

Foreclosure normally happens when a borrower defaults on a mortgage for one reason or another but mostly as a result of some financial distress. It is one of the most debilitating experience that homeowners go through during their ownership period. It starts with a payment made past the due date, then a missed payment altogether. Because it is due to lack of funds, catching up with a delinquent payment becomes difficult when the situation that caused it repeats itself the following month.

Foreclosure is Involuntary

In majority of cases, losing one’s home is involuntary and it is something that creeps slowly into the homeowners’ life. But while it is, for the most part involuntary, the events that lead to it are miscalculations on the part of the homeowner. It involves borrowing more than what one can reasonably afford considering the combined earning potential of all the co-borrowers. Or, overspending on other non-mortgage related expenses such as cars and excessive use of credit cards. However, the single most prevalent cause of foreclosure is the loss of employment or inability to work, possibly due to health reasons. In recent years, it is caused by the increase in the monthly payments associated with the adjustable mortgages when the artificially low teaser rates expire.

Effects of Foreclosure

While impaired credit seems be the most obvious effect of losing one’s home to foreclosure, its effects on family relations is more lasting and debilitating. It is not uncommon for tempers to run short when bills are not paid on time and the phone collectors keep calling. Foreclosure may remain on the credit report for a long as 10 years and reduce one’s Fico Scores to between 200 - 300 basis points. Fannie Mae and Freddie Mac, the nations two largest source of mortgage financing sent out new guidelines to lenders intended for walkaways and other foreclosure situations. Fannie will now prohibit foreclosed borrowers from getting another mortgage through the giant investor for five years, unless there are “documented extenuating circumstances.”

What is a Short Sale?

Short Sale is selling one’s property at a price lower than what is owed on the property that necessitates negotiating with the existing lender(s) to reduce the payoff to enable to sale. In most cases, the Short Sale route is taken to avoid going to foreclosure. It involves proving to the lender that the seller is in financial difficulty and is unable to continue keeping the payments and requests the lender for a short pay - reduction on the pay-offs of the loan(s). The process normally takes between 5 to 10 weeks, with some lenders taking longer. With the falling prices in today’s market while at the same time the adjustable mortgage payments keep going up, homeowners have chosen to sell their homes on Short Sale.

How Different is a Short Sale from Foreclosure?

Firstly, short sale is a choice. Foreclosure is involuntary. In a Short Sale, the owners choose when they want to move out and into their new home or rental. In foreclosure…the family is being locked out of their old home. The “for sale” sign placed in front of the home is not any different than a normal sale while a REPO normally gets that sign. The phone calls normally subside once an offer is submitted for the lenders’ approval. In a short sale, the owners do not have any interest nor equity in the home while the seller in foreclosure may still have equity left.

Effects of Short Sale

Most sellers these days choose to go on Short Sale a way to relieve themselves of the burden of high payments on a home that is upside down in value. As the sellers normally stop making the mortgage payments, a short sale results in a substantial impairment on their credit. However, after the loan is paid off, the lenders normally report it as “Settled for less than full value.” Some experts say that the sellers are able to buy another home in as short as two years but it all depends on how fast their Fico Scores are restored. Just as in foreclosure, there may be tax implications on the resulting debt relief. President Bush signed the Mortgage Forgiveness Debt Relief Act for home acquisition loans that are forgiven during foreclosure or short sale.

Can all Brokers Negotiate Short Sales?

It is not fair to address that question and label others as being unfit to negotiate with lenders. But it takes a certain degree of expertise and patience to follow-up with the lender once a package is submitted.

Because of the sheer number of loans that have gone bad during the last 2 years, lenders are inundated with so many requests for loss mitigations and short sales. The rejection rate of most Short Sale offers is very high and if you choose the wrong broker, the very issue of foreclosure that you’re trying to avoid may end up being your pitfall.

We really can’t afford our current payments…do we have other options?

Yes. You can do nothing and let the bank take your property and lock you out. Loan Modification is another option. You can negotiate with your current lender to have your current adjustable rate converted to fix rate. Example: You have an adjustable rate Option Arm Loan for $600,000 with a current payment of $2350 and will soon go up to $4200. The lender is likely to propose a 6% fixed rate loan for 10 years amortized for 30 years with payments of $3600. If you’re struggling with $2350 then the new Fixed payments of $3600 would kill you faster.

Why can’t we just mail-in the keys to the Lender and Walk-away?

Mailing your keys to the lender or mailing in an unsolicited Deed-in-Lieu-of-Foreclosure are referred to as Walk-away homeowners and Lenders are not real happy with them. The Mortgage Forgiveness Debt Relief Act of 2007 signed by President Bush last year was intended to relieve homeowners of the burden of having to pay taxes on the debt that is forgiven by the lender in the event of foreclosure or a negotiated Short Sale. Some mortgage companies, and most specially some Private Mortgage Companies (PMI) treat these Walk-away homeowners differently and will issue them a 1099. Their contention is that these homeowners, and rightfully some are, just found it convenient to just walk away from their homes are the value has fallen much below their loan balance, or their payments are higher than what they’re willing to pay.

What is our best option if we really can’t afford to keep the home?

There is a lot of documentation to gather and present to your existing lender in order to get their approval to sell your home Short. But your cooperation is worth the benefits. It is by far a lot better to avoid having “Foreclosure” on your credit report and not risk the tax repercussions of walking away from the home and just sending in the keys. Short Sale is by far your best option, as in the first place, it requires your lender approval of the reduction of your mortgage payoff in order to allow the sale to go through.

Ray Parayno has been a real estate broker for over 30 years and is real familiar with Short Sales having been through these real estate downswings in the eighties and the nineties. For more information on Short Sales and Foreclosures, visit: http://lossmitigationsinc.com