People facing foreclosure, those who have already lost their homes to foreclosure (but prior to a sheriff sale), and even those who are just about ready to be removed from their homes by a sheriff have options. They may not only be able to partially salvage their credit, but they may also be able to obtain some cash on their way to obtaining a new start.
When facing foreclosure and forced removal from a sheriff, your family has numerous options to choose from, among the options 1) a standalone home loan modification (lowering monthly payments, possible loan forgiveness, etc.); 2) a loan modification within a Chapter 7 or 13 Bankruptcy; 3) a short sale – selling the property at below the amount owed, with the permission of the bank or 4) deed in lieu – loan forgiveness, plus a possibility of cash to vacate the home. These different choices also have an effect on one’s credit score. That’s important to keep in mind if you want to buy another home down the road.
Which of the above listed options you should choose depends upon what you want to do and your circumstances. Do you want to stay in your home? During the last downward turn in the real estate market, there are plenty of people who ended up in upside-down homes (where the debt is above the market value). But now with an uptick in the market, some houses have regained their pre-downturn value, whereas others stayed at their lower value. What are your financial and stage of life circumstances? Are you nearing retirement age and looking to re-locate into senior housing or are you in the middle of your working career? Do you live with your children, who are cash rich, but who do not have good credit? Staying in your home then would make sense. Some people are actually looking to downsize to a smaller home and more importantly to smaller loan amounts and smaller monthly payments. In some situations, the bank has three years to sue a former home owner for a past mortgage debt. A home owner has to be careful in walking away from an unpaid mortgage debt and then taking an ownership interest in a new home or property. The following will explain your options.
- A standalone home loan modification – There has been new home mortgage legislation since March 2016, which regulates how home loans are sought and received. Depending upon your income, life circumstances, hardships and upon your application, your goal is to achieve a lower monthly payment, pushing the amount due to the back of the loan, and then for some, there is a certain amount of principal debt forgiveness. This is for people who want to stay in their home, who have little or no other debts and whose loan to debt to home value is within an acceptable range. This is the best option for salvaging your credit.
- Loan modification within a Chapter 7 or Chapter 13 Bankruptcy – This is for people who are already past the point of answering foreclosure papers, whose banks are not willing to entertain a normal loan modification, and who also have other outstanding debts (either secured debts, i.e. boats & cars or unsecured, i.e. medical or credit card). Even if you are days away from a bank sale of your home, you are eligible for a chapter 7 or 13 bankruptcy stay and an opportunity to obtain a bank loan to remain in your home. This is not the top option for your credit score, but if you want to stay in your home and do not foresee any large credit purchases in your near future, it may be the best.
- Short sale – This is for people would like to move out of their home, best for people who either want to move into another home with a lower debt to value ratio or want to stay out of the housing market until they get back on their feet. In a short sale, the bank agrees to give you permission to sell the home at a value lower than the mortgage debt. The bank forgives the excess debt. There are some potential tax liabilities for certain people with this option that you should discuss with a certified accountant, before going taking this option, but this is least credit damaging way to leave a foreclosure property, besides a standalone loan modification.
- Deed in Lieu – This is another option to leave your home, with the added benefit of potential cash incentive to leave your home early. In this case, you leave your home with the knowledge that the bank will forgive your mortgage debt. The amount of money you receive to leave depends upon a host of factors, including your other debts, and the time you need to leave. This option, like all other options above are best left to an attorney to negotiate. I have met many clients who have attempted a cash-for-keys themselves, and at the end of the day, either their loan was not truly forgiven or their ‘cash’ was eaten up by unknown or unspoken fees, taxes, etc. This is not great for your credit score, but not as bad as bankruptcy and in these times, the credit companies are a lot more forgiving after a couple of years of making steady payments.
DISCLAIMER – This does not constitute a legal opinion. Nor does it create a legal relationship. Please speak with an attorney and an accountant before you make any of these choices.
|Raymond is experienced in a host of different areas, including Immigration, Criminal, Divorce & Family Law, Wills & Estate, Incorporating your business as well as advising small businesses with their tax and investment choices.|