If you are having difficulty affording your home during hard economic times, you may be able to avoid foreclosure through either a short sale or a deed in lieu of foreclosure. While neither option is as desirable as staying in your home, they do at least help you avoid the costs and hassles associated with foreclosure.
What is a short sale?
A short sale is the sale of your home for an amount less than the amount you still owe on your mortgage. The sale does not have to be to your lender, but your lender has to agree to it. Borrowers choose this option when they cannot afford to continue making monthly mortgage payments and cannot pay the difference between the sale price and the unpaid mortgage amount. However, the borrower is not freed from his obligation to repay the remaining mortgage balance unless the lender agrees. Many lenders require that disadvantaged borrowers provide proof of economic or financial hardship before agreeing to a short sale.
Advantages of a short sale:
- You no longer have a mortgage payment.
- You can buy another home in 2 years, rather than 5-7 years, if you foreclose.
- You save yourself the costs and fees usually associated with foreclosure.
Disadvantages of a short sale:
- Your credit report may be damaged if your lender reports the short sale to credit monitoring agencies.
- If you owe money to more than one creditor (for example, if you have taken out second and third mortgages on your property), they will also have to agree to the short sale because they, too, will be paid an amount less than what you owe them.
What is a deed in lieu of foreclosure?
A deed in lieu of foreclosure transfers ownership of your home to your lender to pay off your loan and avoid the foreclosure process. Prior to an ownership transfer, the lender and borrower must enter into a settlement agreement that includes a sale price for the home that is at least equal to its fair market value. The borrower must also enter into the settlement agreement voluntarily and may be required to provide written proof that he is doing so.
Advantages of a deed in lieu of foreclosure:
- Completely satisfies your loan obligation.
- Your credit rating is not as damaged as it is by a foreclosure.
However, issues arise when there is more than one lien holder on the property. If you have outstanding judgments or other unpaid mortgages, your lender would be assuming responsibility for payment of these outstanding obligations if it purchases your home by deed in lieu of foreclosure. Under these circumstances, your lender may wish to foreclose on your home in order to wipe these liens out.
New option: Deed for lease or mortgage to lease
Another alternative to foreclosure, but relatively new, is “deed for lease” or “mortgage to lease” program. This rent-back program was introduced in 2009 by Fannie Mae and banks are trying to implement their own programs.
This rent-back idea is tied to the deed in lieu of foreclosure program in which the lender would have to agree to allow the defaulting borrower to stay in the home as a renter for one to three years. Not everyone qualifies for this program, since it would be at the discretion of the lender.
If you are having trouble making your mortgage payments, you should discuss these options with your lender as soon as possible. It could save you the time, trouble and hardship of going through the full foreclosure process.
Roman Lopez is the owner of The Roman Lopez Real Estate Team, a full service real estate company specializing in Greater Austin home sales, purchases, and investments properties.
Roman has worked and excelled in the real estate business in Austin, TX for the last 7 years. Roman's real estate career started in 2008 where he was named Rookie of the Year for the KB Home Central Texas Division.
After a successful career with KB Home, Roman obtained his real estate licence and joined Keller Williams Realty where he again rose to the top and won Rookie of the Year for Keller Williams Austin.
After a year as a solo agent he built a team of top producing agent, The Roman Lopez Real Estate Team. His team now ranks as one of Keller Williams top teams closing over 200+ residential sales transactions per year.
Roman's designations include: Certified Negotiation Expert, Certified Distressed Property Expert, Certified International Property Expert, Certified International Property Expert, and Global Property Specialist.
Roman's Awards: Keller Williams Austin Rookie of the Year 2011, 2008 KB Home Rookie of the Year Central Texas Division, 2015 Platinum Top 50 Winner, Platinum Top 50 Finalist, 2014 NAHREP Top 250 Latino Agent in the US, 2014 NAHREP Top 20 Latino Agent in Austin, 32015 NAHREP Top 250 Latino Agent in the US, 2015 NAHREP Top 20 Latino Agent in Austin, 2015 Best of Angie's List, 2015 Real Trends Best Real Estate Agents, 2014 Best of Trulia Best Real Estate Agents
If it's your first time buying or selling real estate, you don't know
"Yasmin Hashim and Roman Lopez were really helpful for my condo! I bought the condo half a year ago from Yasmin, and she was really nice and answered all my questions, and the price was really good because of her . Half a year later, she introduced me to her team leader Roman Lopez when I had some questions about the selling condo. Mr. Lopez was very patient, we set up a free consultation. He provided several options and each of them was very decent. I decided to rent my place for a little bit, but I will definitely ask for their help when I sell the property."