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What is Foreclosure?
Foreclosure is the legal means that your lender can use to repossess (take over) your home. When this happens, you must move out of your home. If your property is worth less than the total amount you owe on your mortgage loan, a deficiency judgment could be pursued. If that happens, you may not only lose your home, you could also owe your lender an additional amount. Foreclosures and deficiency judgments could seriously affect your ability to qualify for credit in the future. Avoid Foreclosure whenever possible.
A foreclosure property is a home where a notice of default has been filed in the public records. The owner has stopped making payments and the lender has given notice that unless payments are brought current, it will take the property from the owner. It’s a homeowner’s worst nightmare, and can result in a devastating blow to personal finances. Foreclosure can wipe out the equity in a home, can destroy personal credit for years, and it could mean uprooting a family from their neighborhood, friends and schools.
California is a Trust Deed State, which means you may have less than 4 months before the trustee’s sale. Post-Foreclosure, the lender owns the property and the previous owners are out. The property is then in the lenders REO (Real Estate Owned) department (or) in the hands of a new owner or investor who purchased the property at the auction.
Steps to Avoid Foreclosure
If you are having trouble making payments, don’t walk away – Consider your options:
I. Negotiation with your lender:
- Forbearance: You make reduced payments or no payment for an agreed upon period of time.
- Loan Reinstatement: You agree to make up your missed or reduced payments by a specific date.
- Loan Modification: Your lender agrees to alter the terms of the loan so you can better afford the payments.
- Deed-In-Lieu of Foreclosure: You voluntarily “give back” your property to the lender
II. Contact a HUB Approved Counselor:
- Contact the Federal Housing Administration at www.fha.gov for possible FHA financing
III. File For Bankruptcy:
- Filing for bankruptcy may help you keep your home, or at least get you out from under your mortgage. When you file, the foreclosure process is legally stopped. It can’t be reopened until your bankruptcy case closes or the lender gets court permission to proceed.
IV. Sell Your Home:
- If you simply can’t afford the house on your own, the above options won’t help. You will probably lose your home. Don’t wait for your lender to make the first move! Contact a Realtor® to determine if selling or a short sale might be your best option.
Tips to Avoid Foreclosure:
- Don’t ignore the problem.
- Contact your lender when you realize a problem exists.
- Contact a HUB approved housing counselor.
- Be cautious of foreclosure prevention companies (scams).
- Prioritize your spending. After healthcare, keeping your house is your first priority. Cut optional expenses like entertainment, memberships and delay on any unsecured debt payments.
- Use your Assets; second cars, jewelry or whole life insurance are things you can sell for cash to help reinstate your loan.
What is a Short Sale?
A short sale occurs when a property is sold and the lender agrees to accept a discounted payoff. The lender will release the lien that is secured to the property upon receipt of less money than is actually owed. For example, if the unpaid balance of a loan is $300,000 and a property sells for $250,000, under a short sale the lender might accept $250,000 (usually less any Broker commission) as payment in full.
For owners who can no longer afford to keep mortgage payments current, this is often a better alternative to bankruptcy or foreclosure proceedings if your lender is willing to cooperate.
Qualifications for a Short Sale Typically Include:
- The mortgage is in or near default status.
- The home’s market value has dropped below the unpaid balance due to the lender.
- Seller has fallen on “hard times.”
- Seller has little or no assets to pay the shorted difference. Sellers with assets may be required to pay back the shortfall.
Steps for a Short Sale:
- Seller signs a listing agreement with a Real Estate Agent subject to selling as a short sale with third party lender approval.
- A buyer makes an offer.
- Seller accepts the buyer’s offer.
- Seller’s lender accepts the buyer’s purchase offer.
- Transaction Closes, the lender releases the lien and delivers the deed.
The Consequences of a Short Sale can vary from person to person. You may be subject to tax consequences in the form of the lender issuing you a 1099 for the shorted difference. A short sale usually results in a blemished credit report.
REO’s (Real Estate Owned)
After the foreclosure, the lender owns the property and the previous owners are out. The property is now in the lender REO (Real Estate Owned) Department. The banks often hire Asset Management Companies to handle and eventually sell their REO properties. These properties are typically refereed to Brokers and listed in your local Multiple Listing Service. Contact your Realtor for REO listings. These are most often priced low for an “as is” quick sale. These hot listings offer excellent opportunities for first time buyers, investors and move-up buyers!
Effects of a Foreclosure Compared to a Short Sale
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Issue
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Foreclosure
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Successful Short Sale
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Future Fannie Mae
Loan - Primary Residence
(effective May 21,2008)
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A homeowner who loses a home to Foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years.
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A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed mortgage only after 2 years.
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Future Fannie Mae
Loan - Non Primary (effective May 21, 2008) years
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An Investor who allows a property to go to Foreclosure is ineligible for a Fannie Mae backed investment mortgage for a period of 7 years.
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An investor who successfully negotiates and closes a short sale will be eligible for a Fannie investment mortgage for a period of 7 years. Mae backed investment mortgage after only 2 Years.
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Future Loan with
any Mortgage Company
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On any future 1003 application, a prospective borrower will have to answer YES to question C in Section VIII of the standard 1003 that asks "Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?" This will affect future rates.
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There are no similar declarations or question regarding a short sale.
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Credit Score
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Score may be lowered anywhere from 250 to over 300 points. Typically will affect score for over 3 years.
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Only late payments on mortgage will show and after sale mortgage will be reported as paid or negotiated. This will lower the score as little as 50 points if all other payments are being made. A short sale’s effect can be as brief as 12 to 18 months.
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Credit History
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Foreclosure will remain as a public record on a person’s credit history for 10 years or more.
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A short sale not reported on a credit history. There is no specific reporting item for a “short sale.” The loan is typically reported “paid in full, settled.”
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Security Clearances
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Foreclosure is the most challenging issue against security clearance outside pf a conviction of a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, in the CIA, Security, or any other position that requires a security clearance, in almost all cases clearance will be revoked and position will be terminated.
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A short sale on its own does not challenge most security clearances.
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Current Employment
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Employers have the right and are actively and regularly checking the credit of all employees who are in sensitive positions. A foreclosure in many cases is ground for immediate reassignment or termination
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A short sale is not reported on a credit report and is therefore not a challenge to employment
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Future Employment
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Many employers are requiring credit checks on all job applicants. A foreclosure is one of the most detrimental credit items an applicant can have and in most cases will challenge employment
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A short sale is not reported on a credit report and is therefore not a challenge to employment
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Deficiency Judgment
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In 100% of foreclosures (except those in states where there is no deficiency) the bank has the right to pursue a deficiency judgment
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In some successful short sales it is possible to convince the lender to give up the right to pursue a deficiency judgment against the homeowner.
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Deficiency Judgment (Amount)
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In a foreclosure the home will have to go through an REO process if it does not sell at auction. In most cases this will result in a lower sales price and longer time to sale in a declining market. This will result in a higher possible deficiency judgment.
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In a properly managed short sale the home is sold at a price that should be close to market value and in almost all cases will be better than an REO sale resulting in a lower deficiency.
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Basic Source material provided by Distressed Property Institute, LLC, www.cdpe.com
***This is intended for informational purposes only. Speak to a Real Estate Attorney or a Tax Accountant to determine the consequences of a short sale or foreclosure prior to taking action!
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