What Are My Options?
In today’s economy and current real estate market, it is unfortunate reality that many sellers are at risk of losing their homes to foreclosure. The good news is there are several options available to help avoid the anguish associated with a foreclosure.
A foreclosure is not to anyone’s advantage, the consumer or the bank, and should be avoided at all costs. Please remember, that if the property does go into foreclosure you will still be liable for the difference, known as a “deficiency judgment”, of what is owed on the property versus what is sells for. (For example if you owe $300,000 on the property and it sells at auction for $150,000, you will still be liable for the $150,000 difference.)
Not only are you liable for the difference to the bank, but you will also be liable to the IRS! Hard to believe? It’s a fact; the IRS counts the difference on the sale as a “gain” on your taxes. That’s right — you lost money and it’s counted as a gain! With these liabilities, they can actually garnish your wages. That means if you let your property go to foreclosure, the amount you’re liable for could be taken directly out of your paycheck every week!!
Avoiding Foreclosure: Your Options
Below you will find possible options that may help you avoid foreclosure. Please keep in mind that in a foreclosure situation TIME IS OF THE ESSENCE. Glitches or delays can definitely hurt your chances of favorable conclusion. We highly recommend and encourage that you consult with a competent attorney and accountant regardless of the path you choose, and under no circumstance should you have a foreclosure sale as your goal, as it will destroy your credit and create a serious debt liability.
1. KEEP THE PROPERTY
If you can financially manage this, it really is your best option. Keeping the property would only have an impact on your credit if there is a history of late payments; however, it can be the best and most positive course of action. Can you rent the property (even at a small negative cash flow), and wait to sell in a better market? If you can, you may want to pursue this option. If this option won’t work for you, move on to the following steps.
Sell the property and bring cash to the table.
If there is some equity in your property but not quite enough to sell it in today’s market (and if it is financially feasible), you should consider bringing cash to the table to sell it. This eliminates any credit damage and you can simply sell the property without going through any other processes. If you think you are in a situation where this is possible and you need to sell, this is your best option. If this step is not realistic, move on to the next step.
2. Loan Modification
This works for some, and may possibly be appealing to you, too. If you do apply for a loan modification, make sure you understand exactly the type of program the lender is putting you into, and whether or not it will benefit you not only in the short term, but in the long term as well. If you are approved for a loan modification, it is imperative that you have a lawyer review it so that there is a clear understanding of what you are getting yourself into. Unfortunately, in Maryland, real estate agents cannot help you at all with this process. This is your last resort to remain in the home and should be considered before any of the other options listed below. However, if you are granted a loan medication and miss three payments or are denied, you will need to move on and consider the next step.
3. Short Sale
The short sale is not something that you should be scared of or avoid. Actually, a short sale can be a “win-win” for both you and the lender.
Although it may not fell like it, banks really want to avoid foreclosures at all costs. The expenses associated with foreclosing on a property are astronomical, and the time it takes can be anywhere from 6-18 months (especially in Maryland). By taking a short sale, the bank can limit their loss. To qualify, you have to owe more than your property is worth, and be able to prove a true financial hardship. (Job loss, medical issues, pay cut; things of this nature will qualify you for a short sale.)
To start the short sale process, make sure you find a realtor who is experienced in short sales. The realtor should have over 30 closed, successful short sale transactions. This type of real estate transaction takes a special skill set, and only a select group of realtors know how to navigate the complexities of a short sale.
A short sale will impact your credit, but if the property is your primary residence, in almost every case you can walk away with no deficiency judgment and no IRS gain. (Secondary and investment properties are treated a differently, tax-wise.) Again, consult a qualified attorney and accountant before pursuing a short sale. In today’s market, it may still be your best option.
4. Deed in Lieu of Foreclosure
If you don’t qualify for a loan modification or an attempt on a short sale was unsuccessful, your next course of action is to offer the lender a “Deed in Lieu of Foreclosure”. If for some reason your agent was successful in your short sale, you should try a seeking a more skilled agent to get the short sale re-opened. The requirements for a deed in lieu is similar to a short sale; unable to make payments, owe more on your house than it is worth, and foreclosure is foreseeable in the immediate future.
With a deed in lieu, you are offering to turn the deed over to the lender in exchange for them not foreclose on the property. This may limit some of the lender’s loss, as it eliminates some of the hefty expenditures that a foreclosure brings. The lender may feel taking the property in lieu of foreclosure is worth the cancellation of the note balance. *Though this is a negotiation it should only be performed after consulting a qualified attorney.
Note: Most banks require the deed in lieu to be performed 60 days prior to the auction date and require that you attempt a short sale first, as this is considered a last alternative.
This information is offered as a basic overview to the consumer, providing information and education. Again, every situation is different and should be handled as such. If you would like more information, please contact us as we would be glad to discuss your situation and course of action. Foreclosure can be avoided. Do not just let your property go to foreclosure — you have viable options!