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Sarah Taylor's Blog

By Sarah Taylor | Broker in Port Saint Lucie, FL

Options: When Your Home Is Worth Less Than You Owe

Downward TrendThe bubble, the shift, the downward spiral - we’re all feeling the pinch of falling housing prices. If your house is worth less than you owe when you purchased it, there is one fact:

Every Situation is Different, but You are not Alone.

In this situation, the most important thing you can do is know your options and speak to someone who can give financial or legal advice. In February of 2009, a colleague, myself, and an attorney hosted a Short Sale seminar locally in Port St Lucie, FL. We spent a few hours going over what the options are for a homeowner whose house value is now below what they paid for it.

There are five choices:

  1. Modification of the Loan
  2. Short Sale of the Property
  3. Deed in Lieu of Foreclosure
  4. Bankruptcy
  5. Foreclosure

The degree to which these options hurt your credit increases from one to five.
Making a decision about what to do is emotional and stressful. Unfortunately you can’t throw in the towel or turn in the keys and walk away. The more you are willing to work with and communicate to your lender, understand your options, and seek professional advice - the smoother this process will go.

For options 1 - 3, the bank is typically going to want your story and all of your current financials. What I call this is a “reverse mortgage application” - it’s like proving how you can’t afford the house. The general paperwork the bank is going to need will be a Hardship Letter (explaining on one page why you are where you are), Income Information, Tax Returns, A Breakdown of your Bills (like a montly budget), and Bank Statements.
Important Note: When the bank or negotiator requests this information - submit ALL of it at the SAME time. If you send it piece by piece you’ll get shoved to the bottom of their pile.

I am experienced in helping homeowners make these tough decisions.
If you would like to make a no-obligation appointment to talk about your options, please contact me.

My first questions when speaking to a client about their mortgage versus the value usually are along these lines:

  • What were your original plans for this home? - short term, long term, retirement?
  • Ultimately, do you want to stay in this home?
  • Can you afford your payments?
  • If you can’t afford your payments, what caused this?

The Big Question is whether you have to be late on a payment in order for a bank to work with you?
The short answer: if you’re current on your payments, it may be hard for the bank or negotiator to take you seriously. Please consult an accountant or an attorney that can give you the best advice.

A breakdown of the five options:

1. Modification of Your Mortgage Loan:
There are many types and scenarios for a modification, and each lender’s offering is different. Usually you’ll speak to their “Loss Mitigation” department where they will ask many questions to find out what options are available to you.
Your best option for modification is for Principle Reduction - the bank finds the current value of your house and then reduces the balance of your loan to 90 - 100% of that value. Even though this option has the highest likliehood of keeping a homeowner in their home, most banks won’t offer principle reduction.
What they do offer can be any array of choices ranging from allowing the owner to skip a few payments or reducing the interest rate for a period of time. I think the current statistic is that 40% of modified loans end up back in default.

2. Short Sale the Property:
The term “Short” doesn’t mean the time process, it is referring to the concept of selling the house for less than (short of) the balance that is owed on the mortgage. If you ultimately want to be rid of the property, this option is the best and least credit-damaging (however, the late payments on your credit report will not help). When listing your property for sale with a Realtor, the general rule of thumb is to have the listing price at or below the comparable homes to attract a buyer in the fastest amount of time. Once you have a buyer make an offer and you accept their offer, your Realtor will now submit the offer (along with your hardship package) to the bank/lender. The lender orders a BPO, which is a Broker’s Price Opinion - kind of like a mini-appraisal from a third party (usually a broker or realtor) of what the property is currently valued out. The bank reviews your financials, assesses what their loss will be compared to the current value of the property, and then either accepts or rejects the buyer’s offer.
Maybe the buyer made an offer below the market value; that’s okay, because now we can explain in the listing notes “Bank approved listing price” which signals other Realtors that the house has been approved by the bank and we have open communication.

3. Deed In Lieu of Foreclosure:
The modification didn’t help, no one is willing to buy the property as short sale - the next option is a Deed In Lieu of a Foreclosure which is basically giving the house back to the bank without going through the foreclosure process.

4. Bankruptcy:
Talk to an attorney about this - the attorney at our seminar stated repeatedly, “You can file bankruptcy at any time.” As I understand it, the BK laws are changing and the debt related to a primary residence may not be so easy to get rid of. That’s all I got to say `bout that.

5. Foreclosure:
This is the lender/bank taking legal action and suing the homeowner for not paying their loan and taking the house (collateral) back. Foreclosures will stay on a credit report for seven years and are the ugliest of blemishes. Once the bank has the house back, they now consider it “REO,” or Real Estate Owned and will normally put it on the market for sale with a Realtor.

I am experienced in helping homeowners make these tough decisions.
If you would like to make an appointment to talk about your options, please contact me.

Copyright 2009 | Sarah Taylor, Port St Lucie Realtor

Comments

By David & Samuel Rifkin,  Wed Apr 10 2013, 09:32
Thank you for this great information.

Samuel Rifkin
The Rifkin Team


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