What You Should Know About Foreclosure

By August 28, 2008Mortgage

Are you facing the possibility of a foreclosure? Before bailing out without a parachute, do some homework and see if there are ways to minimize or even eliminate your losses.

Obviously, you’re certainly better off selling the house than having it go to foreclosure. If you can find a buyer who will offer to pay at least what you owe your lender, take the offer rather than face a foreclosure. However, this solution is generally not easy to come by and usually not timely enough to satisfy the mortgage company.

If you receive an offer that is for less than what you owe your lender, your lender can actually block the sale. Yet you can approach your mortgage company about a “short” sale or deed in lieu of foreclosure. However, one stipulation to qualify is that you must occupy the property. (A short sale of property is one in which the sale proceeds won’t cover the amount owed on the loan and the lender agrees to forego the rest.) Many lenders will agree to a short sale, but some may require documentation of any financial or medical hardship you have experienced before agreeing to a short sale.

Also, be aware of current market values. Check out prices of comparable properties – ones that are the same size in the same neighborhood that sold during the last six to 12 months – on websites such as www.domania.com.

Another option is to simply execute a deed giving the property back to the mortgage company. You do not need to actually qualify for a deed in lieu of foreclosure.

You may have been told by the mortgage company that you didn’t “qualify” (mortgage companies typically don’t want the property back), but they cannot stop you from executing a deed in the company’s favor. The difference between the house’s value (the amount for which the company sells it) and the total balance owed. This difference is called a deficiency. Unless the mortgage company writes off the deficiency, you are still liable for that amount.

If the mortgage company writes off any part of the deficiency, you’ll receive an IRS Form 1099-Misc next year and the amount written off will have to be reported as income. However, you can avoid this if you can show that at the time of the write-off, your debts exceeded the value of your assets. We recommend having an accountant or professional tax preparer assist you before the April 15 filing date.

If you want to try to negotiate with the mortgage company – either on the mortgage now or on the deficiency balance later, visit www.myvesta.org
(formerly Debt Counselors of America), or call 800-MYVESTA.

Foreclosure Proceedings
Most lenders don’t start foreclosure proceedings until you’ve missed four or five payments, but it varies from state to state. Before taking back your house, most lenders would rather rewrite the loan, suspend principal payments for a while (have you pay interest only), reduce your payments or even let you miss a few payments and spread them out over time.

If your loan is owned by one of the giant U.S. government mortgage holders, Fannie Mae or Freddie Mac, foreclosure could come even more slowly. Fannie Mae and Freddie Mac have been working with homeowners to avoid foreclosure when a loan is delinquent.

If your loan is insured by a federal agency, such as the Department of Housing and Urban Development (HUD) or the Federal Housing Administration (FHA), the lender may be required to try to assist you in preventing foreclosure.

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