Before you move forward with a short sale, make sure you understand the facts. Below we outline how to navigate a short sale, and also discuss alternatives that may be available to you.
What is a Short Sale?
A sale of a home is deemed a “short sale” when the house is sold for less than the amount that the owner owes to a mortgage lender. There are many reasons that a homeowner might consider this. The main reason is that if a mortgage lender agrees to a short sale, it allows the homeowner to pay off all, or a portion of, the mortgage balance from the proceeds of the sale. Here are some reasons why a homeowner might consider a short sale instead of foreclosure:
- The homeowner is ineligible to refinance or modify the mortgage (more on this later)
- The homeowner is facing a long-term hardship such as a medical issue or loss of a job
- The homeowner is behind on mortgage payments
- The homeowner owns more on the home than it’s worth
- The homeowner has not been able to sell the home at a price that covers what is still owed on the mortgage
- The homeowner can no longer afford the home and is ready or needs to leave
Depending on a homeowner’s specific situation, he or she may also be required to make a financial contribution to receive a short sale.
Good and Bad of Short Sales
A short sale can be a way for a homeowner to avoid having a full foreclosure on his or her credit record. A foreclosure is when a homeowner’s rights to a property are forfeited because they have been unable to pay the mortgage. At that point the house will be sold at a foreclosure auction. If it does not sell at the auction, then the lending company will take over ownership.
A short sale also negatively impacts an owner’s credit score, making it hard to receive other loans down the road. This damage can be minimized if the homeowner is able to have the lender report the debt to credit bureaus as “paid in full.”
Short sales can also be difficult because every lender that is owed money must agree to take less than they were expecting. Often times this means the lender will receive no money at all. Everyone owed money must agree to this, which is why it can be difficult to be granted a short sale, and often why short sales often fall through.
But There Are Alternatives!
Short sales are complicated. It can be difficult to get lenders to agree to take a loss on a property. The bank can sometimes pursue the amount of the deficiency from the homeowner. Further, a short sale can result in painful tax consequences for the homeowner. Before you decide a short sale is right for you, talk to someone who can give you the straight facts.
Refinancing Your Home
Before you consider a short sale, know that there are numerous options for refinancing your home. These options can help you avoid foreclosure.
Refinancing means securing a new loan with a different, and even better interest term rate, new terms, and a new monthly payment. This option completely replaces the previous mortgage. The payment is made more affordable through either lowering your interest rate or adjusting the terms of the loan.
The first mortgage is paid off, which allows the second loan to be created. Borrowers with a good credit history often find refinancing to be a good way of converting a variable loan rate to a fixed rate, while also securing a lower interest rate. Refinancing can be a riskier choice for borrowers with less than perfect, or even bad credit, or too much debt. Refinancing will also not negatively impact your credit activity or history.
Even if the value of your home has decreased or if you are underwater and you owe more than your home is worth, you may be able to refinance your loan.
Home Affordable Refinance Program (HARP)
The government offers the Home Affordable Refinance Program (HARP) to help you refinance. This is a federal program that was created by the Federal Housing Finance Agency in March 2009 to help underwater and near-underwater homeowners refinance their mortgages. There are various places online where you can see if you qualify for HARP.
Typically, you will need to provide the following to see if you are eligible:
- Your most recent income tax return
- Information about any junior lien mortgage on the house
- Account balances and monthly payments for all of your debts
HARP can be a great option for struggling homeowners.
A repayment plan is an agreement between a homeowner and the mortgage lender where the homeowner pays the past due amount that is owed. It is used to help resolve the delinquency. Typically the past due amount is added on to mortgage payments—over a specified time period in order to bring the mortgage current. Essentially, a repayment plan allows a homeowner to catch up on your past due payments over an extended period of time. This is less damaging to a homeowner’s credit score than a foreclosure and also allows the homeowner to stay in their home while avoiding foreclosure.
A forbearance is when a mortgage company temporarily suspends or reduces a homeowner’s monthly mortgage payments for a specified period of time in order to allow a homeowner to get back on solid financial footing. Tax, insurance, escrow, or impound amounts can be suspended for a set period of time, which will help a homeowner stay in their home and avoid forbearance. This option is also less damaging to your credit score than a foreclosure.
Your lender will need to determine if you are eligible for a forbearance, but often that eligibility is based on a loss of income due to a number of things, including medical illness, death of a co-borrower, natural disaster, or unemployment. All of these circumstances must have a clear end so that the lender can set an amount of time.
A modification is an agreement between a homeowner and a mortgage company to change the original terms of the mortgage. Terms include payment amount, length of loan, interest rate, etc. This can help to reduce monthly mortgage payments so that they are more affordable for a homeowner. This is also less damaging to a credit score than a foreclosure.
Home Affordable Modification Program (HAMP)
The Home Affordable Modification Program was outlined in 2009 and provides clear and consistent loan modification guidelines when it comes to the modification of a home. Under HAMP, a loan is modified so that a monthly mortgage payment is no more than 31% of your gross (pre-tax) monthly income. If a homeowner is eligible, the modification permanently changes the original terms of the mortgage.
- The homeowner is ineligible to refinance
- The homeowner is facing a long-term hardship
- The homeowner is behind on your mortgage payments or likely to fall behind soon
- The original loan was originated on or before January 1, 2009 (i.e., the date the homeowner closed your loan)
- The loan is owned by Fannie Mae or Freddie Mac – or is serviced by a mortgage company that is participating in the HAMP program.
Chapter 7 and Chapter 13 As Options
If you are interested in saving your home and refinancing is not an option, filing bankruptcy may be an option. A Chapter 7 or Chapter 13 bankruptcy will discharge any deficiency resulting from a short sale. When you file either Chapter 7 or Chapter 13 bankruptcy, the court issues an automatic stay. Any foreclosure action immediately stops. This can give you some breathing room to figure out your next move. In a Chapter 13 bankruptcy, the past due amount can be repaid over three to five years without any added interest or penalties. You can actually cure your missed payments over 60 months!
Chapter 13 bankruptcy is designed to allow you to keep all of your property, but is also determined by your property. The amount of your nonexempt property affects how much unsecured creditors get paid during your bankruptcy process. And to avoid foreclosure or repossession, you still need to keep up with the payments you make for you secured debt, such as mortgages or car loans.
When you file a Chapter 7 bankruptcy, almost all of your assets and property are liquidated and thus become the property of the bankruptcy estate that is sold to allow you to repay your debts. There are some exceptions to this though.
During your Chapter 7 bankruptcy, a bankruptcy trustee is appointed and given the authority to sell your assets so that you are able to pay your creditors. Just because your assets are being sold, that does not mean that all of your property needs to be sold.
Trust RHM LAW LLP for Trusted Legal Advice
To avoid foreclosure and learn more about short sales as well as refinancing options or even bankruptcy, speak with an experienced attorney. It is easy to feel helpless in a situation like this. The right lawyer can help save your home using a number of legal options. At RHM LAW LLP, we help the people throughout the San Fernando Valley, Los Angeles, Riverside, San Bernardino and Orange counties to avoid home foreclosure and get the debt relief they deserve. If you need to avoid home foreclosure and you have decided to pursue bankruptcy as an option or a home loan modification, we will help you save your home.