Short Sales and other Alternatives To avoid foreclosure By James Agee

If you're struggling with mortgage payments and feel overwhelmed, know that you're not alone. Many homeowners face this situation.  Sadly many people I meet either don’t know their options or don’t seem to care. Kind of like the boat is sinking let’s make the hole bigger. Unaware of their options they adopt a defeatist attitude, worsening their circumstances. There are some options out there.  Are they always great options? No but they are much better than a Foreclosure.  The idea is you pick the lesser of the evils and while many of them may not be your ideal situation there is going to be one option out of them all that is going to be best for you and your family in the long run.  I will discuss the available options and their characteristics. First, we will define what constitutes a qualified hardship versus what does not. Then, we will explore alternatives such as refinancing, forbearance, loan modification, pre-foreclosure sale, selling and bringing cash to closing, short sale, and deed-in-lieu of foreclosure.

Several options may allow you to remain in your current home. However, for many of these, as well as for a short sale, you must demonstrate a qualifying hardship. While being behind on mortgage payments might seem like an obvious hardship, lenders have specific criteria. Simply being on a fixed income or unable to pay the mortgage does not qualify. Acceptable hardships include job loss, divorce, reduced wages or hours, illness, medical bills, loss of benefits, increased health insurance costs, death of a spouse, increased mortgage payments, natural disasters, business failure, and job relocation of 50+ miles. Conversely, loss of equity, desire to downsize, increased family size, fixed income, or excessive spending are not considered hardships.

Several options exist to help you stay in your current home. One such option is refinancing your mortgage. If you're in good financial standing but struggling with monthly payments, refinancing can be a viable solution. This involves replacing your existing loan with a new one that offers more favorable terms. However, carefully consider interest rates, the remaining term of your current mortgage, and the terms of the new loan. Refinancing is advantageous if you have a higher interest rate, but it may not be beneficial if your current rate is lower than prevailing rates. Also, be aware that refinancing can sometimes extend the loan term, essentially adding back years of payments. Other factors to consider include the need to provide proof of employment, a sufficiently high FICO score for approval, and potential closing costs, which can range from 2% to 5% of the loan amount. Consult with your lender or a mortgage broker to determine if refinancing is a suitable option, paying close attention to the interest rate and the extended loan term.

Another option to consider for staying in your home is forbearance. Forbearance allows borrowers facing financial hardship to temporarily suspend their mortgage payments for a designated period. In the forbearance agreement, the lender may agree to spread out the repayment of missed payments, penalties, and fees, allowing you time to catch up. The specific terms and available options will vary depending on your loan holder. Typically, you must demonstrate a qualifying hardship to be eligible for forbearance.

The next option for remaining in your home is a loan modification. A loan modification involves altering the terms of your existing loan to make it more affordable if you're experiencing a qualified hardship. Lenders may offer solutions such as reducing or rolling back interest rates, forgiving past-due payments, adding those payments to the loan balance, or consolidating all fees into a new fixed-rate loan. Various loan modification programs exist, depending on your lender or servicer. However, not all lenders offer this option, and the terms and conditions will vary. It's crucial to note that loan modifications can have tax implications and may negatively affect your credit score.

Now, let's explore options that involve relinquishing your home. A pre-foreclosure sale is a particularly advantageous option in the current market. In Florida, where I practice real estate, many homes have substantial equity resulting from the recent Covid boom. While you may not be able to retain your home, you can potentially capitalize on this equity. With significant equity, you may be able to sell the property for more than the outstanding debt, even after accounting for missed payments and bank fees. Engaging an experienced real estate agent, ideally an NAR-certified SFR (Short Sales and Foreclosure Resource), is essential. This agent should have expertise in pre-foreclosure sales, short sales, and foreclosure sales. A swift sale is crucial to minimize accrued fees and interest, maximizing your proceeds. Moreover, an experienced agent can navigate potential complexities, as the sale may transition into a short sale depending on time, equity, and accumulated fees.

The next option, selling and bringing cash to closing, is feasible for only a small minority of distressed property owners. This requires the financial capacity to settle the remaining debt after the sale. Essentially, you sell your home and pay the outstanding balance at closing. This option is viable only if the sale price is relatively close to the debt owed and you possess the necessary funds. Most homeowners in default do not meet these criteria.

The next available option is a short sale. A short sale involves listing and selling the property for a price that partially satisfies the outstanding mortgage debt. The sale is negotiated with the mortgage company, where the lender agrees to accept less than the total amount owed—hence the term 'short' sale. While short sales can have tax implications and negatively impact your credit score, they are generally a much more preferable alternative to foreclosure.

The last option is Deed in-Lieu of Foreclosure.  You offer the property to the lender for them to cancel the Mortgage note.  The hope is lender will acquire the property sooner and it will not get destroyed sometimes referred to as 'Keys for Cash' because sometimes the lender may even pay a very nominal fee to you to get the property undamaged. This is the worst option and is bad on your credit but it is still better than a foreclosure.   You and or your attorney will need to work this option out.

In closing here are some things to consider.  First I hear this all the time “my credit is already ruined who cares about a foreclosure?”  Well this may be true that your credit is not good but it can be worse.  Don’t further throw gasoline on it.  Or I hear “I don’t care about my credit.” Well you should.  A Foreclosure can ruin your credit make it hard to find a place to rent. Increase all your insurance rates, affect your ability to buy a house and your ability to keep or get a job.   It can affect if you have to pay a deposit and how much for a cell phone plan, your utilities, your internet and ect.   A lot of people that are facing the possibility of foreclosure want to ignore the problem like it will go away.  It won’t.  In the end as in my state the Sheriff will eventually come and remove you from the home.  The best thing you can do is act fast.  Time is money when dealing with foreclosure.  Sure you would like to stay in your home but if you are going to lose your home in the end its much better to make some money off it and save your credit and your ability to buy another home in the future.  Another thing to consider is some people say about Short Sales “I don’t want to have to pay taxes on forgiven debt.”  Well Congress has passed laws to not have that counted as income year after year.  The Consolidated Appropriations Act (CAA) extended the provisions in the Mortgage Debt Relief Act of 2007 to exclude canceled qualified mortgage debt (limited to $750,000) from taxable income through 2025. But as always you want to talk to your qualified Tax Professional about the unique implications from a Short Sale or Foreclosure or most of the options I have discussed in this article.  In closing these are your options available to you remember act now time is of the essence.