If you have an underwater mortgage where your home value is less than your outstanding loans, then you need to seriously explore some options. In fact, life is way too short to spend years in fear and turmoil in hopes of a recovery in your home value.
The first step is a free home valuation or what banks call a Broker Price Opinion (BPO). Once you have your home’s value, your sole goal should be to avoid foreclosure. The two most reliable options to avoid a foreclosure is:
- Short Sale
- Deed in Lieu
Both of these options are preferable to a foreclosure since they do create much less damage to your credit rating. In both cases, you may be left with a deficiency balance, leaving you with both a debt to deal with and possible tax implications.
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 Shot Sale, the lender accepts less money than the balance of loans. In order to be approved for a short sale, you will have to provide your mortgage lender’s loss mitigation team with documentation of your income and assets, so they can verify that you have a financial hardship and that you truly cannot afford the home.
After the close of escrow, 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 is a deed-in-lieu of foreclosure (DIL). In a deed in lieu of foreclosure, you give the property 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.
As usual if you have any questions, feel free to contact us.