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Brendan O'heir's Blog

By Brendan O'Heir | Real Estate Pro in Boston, MA

How To Avoid Foreclosure in 2012

Despite some promising financial indicators in the past year, there is little doubt that the housing crisis in the US continues with very little relief, with more than a million foreclosures in both 2010 and 2011. It can be extremely easy for a homeowner in this depressed economy to be unable to make their mortgage payments or to sell their house for what they paid. All it takes is a single serious accident, loss of a job, or other significant change in their situation to prevent them from being able to make their monthly payments. For people looking to avoid foreclosure, there are very few good options available. The short sale is one of these options.

Essentially, a short sale means selling a house under mortgage for less than its original purchase price, to avoid foreclosure. In the current housing market, prices are depressed and many houses simply cannot fetch the price that they were worth several years ago. According to a recent CNN article, 46% of house sales in November 2011 were for either for foreclosures or for less money than the house was originally worth. No one likes the idea of losing money on a housing investment, but selling a house short is still significantly better financially than having it foreclosed on.

The major benefit to a short sale is that it does avoid foreclosure, and it allows the homeowner to get out from under their debt in an orderly way. Also, a short sale has less effect on a homeowner's ability to purchase a new house in the future. A homeowner with a foreclosure on their record could have to wait as long as five or six years before being able to buy a new home at a reasonable interest rate. A short sale reduces that wait to around twenty-four months.

However, there are several issues that a homeowner must consider when looking into a short sale:

First, the original lender has to agree to it, knowing that they will also be losing money on the venture. If a homeowner can demonstrate that they cannot continue to make their mortgage payments, and cannot come to a satisfactory agreement for extensions or refinancing, the lender will still often lose less money in the long run by agreeing to a short sale. Fundamentally, the lenders want to avoid foreclosureas well, because otherwise it means they become responsible for upkeep, local taxes, and the eventual sale of the house.

Additionally, a short sale will still have a negative effect on the homeowner's credit rating. While in many cases the effect is less than with a foreclosure, it will still cause a serious drop in their credit score.

There may also be additional costs involved with the sale. To agree to a short sale a lender will often demand the homeowner sign a promissory note agreeing to repay the difference between the original loan and the final sale price. Or, if they do not, the amount of loan that is forgiven is considered taxable income by the IRS, and will have to be included in the seller's next tax return.

In general, for a homeowner hoping to avoid foreclosure, a short sale is one of the less desirable options. It would be better for them to come to some sort of arrangement with their lender to change their payments or refinance the home. However, for those that cannot do this, a short sale is still a much better option than foreclosure. Homeowners facing this situation would be advised to contact their lender's loss mitigation department to discuss their options.

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