Foreclosure is defined as the "process of taking possession of a mortgaged property as a result of someone's failure to keep up mortgage payment." This is a simple definition for a very complicated and overwhelming process. Consumers facing the possibility of foreclosure suffer both financially and emotionally from losing their homes.
Consumers can minimize the fear and paralysis associated with foreclosure by arming themselves with knowledge that will help increase their chances of a loan workout or amicable walk-away. Through my experiences in assisting families--having worked with lenders, law firms, and government agencies in the loan workout industry--I have gained a wealth of information and am sharing some simple tips for homeowners who are looking to fix their housing situation.
1) State Programs For Homeowners
The foreclosure process varies from state to state and includes both state and national guidelines. Many consumers aren’t familiar with programs offered by states for those who have fallen behind on their mortgage payments. Understanding your State’s foreclosure prevention programs and laws that protect homeowners and consumers can make a difference in keeping your home or walking away on your own terms.
For example, in the state of Michigan, there is legislation referred to as a 3205 Notice. This legislation requires a written notice to be sent to a borrower who has fallen delinquent on their payments. While most are aware that receiving a notice is standard practice, very few know that a written response can delay foreclosure proceedings. In Michigan, if a homeowner responds to this notice within 14 days, a temporary halt occurs and a 90 day freeze is put into place. The three months provided may allow time to modify the existing loan and ultimately save the property.
Consumers can find information about programs in their state by looking at the National Consumer Law Center website or checking their local state resources. .
2) Deed in Lieu of Foreclosure
Ideally, the first action for a homeowner who has missed payments is to communicate directly with their lender or retain an expert to assist them. Based on this communication, lenders may offer a Deed in Lieu of Foreclosure. A deed in lieu of foreclosure is an option meant to benefit both parties, the consumer and the lender. Essentially, the homeowner agrees to give up the deed to the property and the lender agrees not to pursue a foreclosure and potentially waive any future liability that the homeowner might otherwise incur. This is desirable to the bank because the property is transferred much sooner than in a normal foreclosure proceeding without damage to the property. A homeowner walks away from the situation with a release of liability (sometimes referred to as a "release of deficiency") and without a foreclosure on their credit record. This is often referred to as the loan being "settled less than full." The ability to do a deed in lieu of foreclosure hinges on a few factors including who the investor of the loan is and whether or not there are any other mortgages on the property. Generally, this option is not available to homeowners who have a second mortgage or an equity line of credit.
3) Short Sale
Significant benefits are available to homeowners who choose to short sale their home and are informed on the proper way to do it. The Mortgage Forgiveness Debt Relief Act and Debt Cancellation detailed options available to homeowners from 2007 to 2013. In the case of a short sale, homeowners may receive up to $3,000 for relocation assistance and can be given a 1099C (Cancellation of Debt) which is treated like income for tax purposes. It’s useful for homeowners to know that there are options available for the remainder of 2013 and it may be to their advantage to short sell during the year before the law sunsets. Current legislation allows a homeowner who completes a short sale of their primary residence by December 31, 2013 to avoid tax liability by claiming the primary residence exemption on their taxes.
Many homeowners in fear of foreclosure are not aware that a home can be sold to a family member, friend, or relative. Experts in the housing industry can help negotiate this type of sale and are required to disclose all of the pertinent information to the lender regarding the sale. With proper negotiation and disclosure, a family home can be saved.
4) Cash for Keys
Cash for Keys is a program that may allow homeowners or tenants in foreclosed homes to avoid eviction. This option is only available after a foreclosure on the property. If a lender is willing to negotiate, an agreement is made between the homeowner/tenant and the lender that includes a few basic components. First, the tenant must agree to vacate the premises and leave the property in good condition. In return, the lender agrees to pay the homeowner an agreed upon amount, usually in the form of a certified check, once the keys have been turned over to the bank’s real estate agent. If negotiated properly, the consumer walks away from the home in exchange for cash payment that can range from $1,500 to $30,000, depending on the value of the home.
There are options available for homeowners, however turning to an expert can be costly. Lawyers that specialize in real estate can be expensive. Subject matter experts are available through loan workout companies which can be useful and more cost efficient. With a bit of help, strategic planning and self-educating, Americans can find ways to keep their homes or walk-away properly.