Despite the huge rise in Silicon Valley home prices, there are still more than 45,000 loans that are underwater meaning that home values are still below the principal value of these loans. But what are the option for these home owners to avoid a home foreclosure? y in your home value.
The first step is a free home valuation or what banks call a Broker Price Opinion (BPO). Once you know your home’s value, your goal should be to avoid foreclosure. The most reliable options to avoid a foreclosure are:
- Short Sale
- Deed in Lieu
Both of these options are preferable to a foreclosure since they do create less damage to your credit score. In fact, there are lenders offering new loans to folks who have had a Short Sale in the past 6 month. Contrast that to bankruptcy of a foreclosure where the wait period is more than 2 years.
A short sale is when you sell your home with the lender’s approval despite the fact that the sale price will not cover all the loans on the property. In a Shot Sale, banks accept less money than the balance of loans secured by real estate. You will have to provide your mortgage lender’s loss mitigation team with documents on your income and assets, so they can verify that you have a financial hardship. Without a financial hardship it’s impossible for your Short Sale to be approved.
After the close of escrow on your Short Sale, you are left with a deficiency balance which is the difference between what you owed to the bank and sales proceed. Your lender may forgive the deficiency balance or it can reserve the right to collect it from you.
Most State have extended the tax forgiveness till the end of 2014, but with the recovering economy and no political appetite to help the middle class, we suspect it will be the last year for this plan.
Deed in Lieu of Foreclosure
The second option to avoid foreclosure is a deed-in-lieu of foreclosure (DIL). In a deed in lieu of foreclosure, you give the property back to your lender voluntarily, in exchange for the lender canceling the loan. The deed to the property is then transferred to the lender. The lender promises not to initiate foreclosure proceedings or to terminate any foreclosure proceedings already underway. The lender may or may not agree to forgive any deficiency balance resulting from the sale of the property.
The key issue in a deed in lieu of foreclosure is whether the lender is willing to forgive the deficiency balance. This is why the short sale is a much more cleaner option since the lender transparently agrees to release all liens against the property despite the fact that the sale price will not cover all loans.
Feel free to contact us if you have any question on these options.