We've been struggling to pay our mortgage for two years, and after having my hours reduced at work, we can just no longer keep up. Are there any alternatives to foreclosure that we should consider?
Yes, you should first consider a short sale. A “short sale” is an agreement between a mortgage lender and a borrower whereby the lender agrees to release the lender’s security interest in real property to facilitate a sale of the property for an amount less than what is owed on the loan. Short sales typically occur where the fair market value of the property has declined and, at the time of the sale, is less than the outstanding balance of the loan which is secured by the property. The current law in California is that the lender cannot obtain a deficiency judgment if the lender agrees to the short sale (SB 931 and SB 458)..
Otherwise, consider a deed in lieu of foreclosure. A deed in lieu of foreclosure is a process by which you as the borrower voluntarily convey all interest in a real property to the bank/lender to satisfy a loan that is in default and avoid foreclosure proceedings. A deed in lieu of foreclosure is much faster than a non-judicial foreclosure, and often times will have less of an adverse impact on your credit record.
With a deed in lieu of foreclosure, you give your home to the lender in exchange for lender canceling the loan. The lender promises not to initiate foreclosure proceedings and to terminate foreclosure proceedings, if any. A deed in lieu of foreclosure is probably going to look better on your credit report than a foreclosure or bankruptcy. However, there are a few caveats if you are the borrower:
First, getting a lender to accept a deed in lieu of foreclosure is difficult these days. Some lenders might accept a deed in lieu rather than incur foreclosure expenses. However, many lenders want cash, not real estate, especially if they already own hundreds of other foreclosed properties. Moveover, lenders may not want to accept a voluntary conveyance if outstanding liens or judgments against the property exist because such situations would force the lender to incur additional expense and time to obtain clear title. Furthermore, the lender may not agree to a voluntary conveyance if there are environmental issues because the lender could become primarily liable for future cleanup costs.
Secondly, usually before a lender will accept a deed in lieu of foreclosure, the lender will probably require you to put your home on the market for a certain period of time (usually 90 days). Lenders would rather you try to sell your house yourself rather than have you simply hand over the title.
Thirdly, if you are going to proceed with this route, you should make sure that the lender agrees in writing to forgive any deficiency on the loan that is not covered by the sale proceeds after the bank sells your house. Typically, this release is contained in the settlement agreement (agreement in lieu of foreclosure). In California, if the property goes through non-judicial foreclosure, the lender in most cases cannot get a deficiency judgment.
Finally, beware that there are potential tax consequences with a deed in lieu of foreclosure (as with short sales and foreclosures). You might be liable to pay income tax on the forgiven debt. However, under the federal Mortgage Debt Forgiveness Tax Relief Act of 2007 (applicable till the end of 2012), you might not need to pay any income tax on canceled debt (which is the unpaid loan balance that is forgiven by lender) resulting from a deed in lieu if you as the borrower satisfy certain conditions for mortgage tax relief (e.g., primary residence, owned for at least 2 years, debt amount of $2 million or less).
Frank W. Chen is licensed to practice law in the State of California. The information presented here is general in nature and is not intended, nor should be construed, as legal advice. This posting does not create any attorney-client relationship with the author. For specific advice about your particular situation, consult your own attorney.
(1) Loan modification
(2) Short Sale
(3) Forbearance Plan
(4) Deed In Lieu
(5) Payoff the entire loan amount
(6) Reinstate - bring the account current
If you can't afford an attorney look up housing agencies in your area. They are usually very well versed in what banks are offering in your area. Good Luck!
This is not legal advice. It is being posted solely for informational purposes.