By Sally Herigstad-- MSN Money
Steve and Debbie Martin are losing their home. That's for sure.
Foreclosure alternatives
The only question is whether it will be in a short sale or a foreclosure. They've found a buyer, who is offering less than what they owe. The Martins just have to get the bank to accept the offer.
In the past, that's been a tall order. Since the housing meltdown began, short-sale offers have often taken months to get a response from overwhelmed lenders. Even then, there have been no clear guidelines about what kinds of offers are acceptable or about how to handle second mortgages that could easily derail the process.
Industry experts estimate that less than half of short-sale offers have been accepted, and many real-estate agents have avoided showing these properties altogether. Ultimately, most of the homes go into foreclosure .
The short sale option
But if the Martins can hold on until April, a new federal program might help.
Starting April 5, lenders in the Home Affordable Modification Program must offer borrowers the option of a short sale, including the minimum amount needed for an acceptable offer, if their mortgage doesn't qualify for a modification.
Once a homeowner applies to list his home as a short sale, lenders must respond to offers within 10 days. The program also offers $1,500 to homeowners to help them move, $1,000 to loan servicers to cover the cost of paperwork and up to $3,000 in incentives to secondary lenders who might otherwise reject an offer.
How you lose your home matters
The Martins bought their home in 2003, when they needed a larger house for themselves, their three grown children and one grandchild. Steve and Debbie made the down payment, and all five adults signed on the loan. Everyone chipped in on the mortgage payments.
The Martins figured that when their kids moved away, they would sell the house and all would share the profits. Then property values in the Pacific Northwest plummeted. As the nest emptied, Steve and Debbie started having trouble paying the mortgage.
Now the Martins can no longer sell the house even for the amount they owe on it. But they don't want to just walk away. They feel a moral obligation to try to pay back their loan, and they don't want to trash their and their children's credit scores. The Martins tried everything before asking the bank to accept a short sale. Steve started taking one of his pensions early in an effort to make ends meet, but it wasn't enough. "We tried to refinance," he said. "We tried that with three institutions, and they all said no because there were too many people on the mortgage. We tried loan modification and had the same issue."
Millions of people like the Martins are finding it hard to hang on to their homes as the Great Recession squeezes both household income and housing values. And many others who owe a lot more than their houses are worth may just want out. Walking away, however, is a terrible choice -- one you could regret for years.
Here's why:
You could get hit with a deficiency judgment. It's common to assume that if you walk away from your home, the bank can't come after you for more money, because the loan was attached to the house.
But that's not always true. In some states, lenders can obtain a deficiency judgment for the difference between what you owed and what they got from selling your house.
Florida is one of those states. "No homeowner should walk away," says Rashmi Airan-Pace, a Florida attorney who specializes in mortgage modifications and foreclosure defense. "Deficiency judgments are very damaging."
Airan-Pace points out that lenders, for example, can seek to garnish wages or place liens on other properties.
Other states, including California and Arizona, are nonrecourse states, which means that laws there prohibit such judgments. You still have to be careful, though; some lenders get borrowers to sign papers obligating them to pay deficiencies anyway.
Foreclosure can ruin your credit scores for up to 10 years. When it comes to the effect on your credit scores, having a few late bills is to foreclosure what having a leaky faucet is to burning down the house.
"When a foreclosure is filed against a property owner, that person's credit will go down 100 points," Airan-Pace says. "At the foreclosure sale, it goes down another 100." She estimates that a short sale would do about one-quarter as much damage to your scores. And though you can start pulling up your credit scores substantially from a short sale or a spate of late payments within a couple of years, a foreclosure can affect your credit history for a decade.
First, do all you can to keep the house
Before you think about letting your home go, make sure you've exhausted every other possibility.
If you can save your home by working extra hours, staying on a strict budget or taking money out of savings, you should consider it. (In general, don't touch your retirement accounts, however.) If you just want out because the value is down, remember that a house is still a place to live, regardless of what the market says it's worth. You would also be wise to consult a credit counseling organization, such as the National Foundation for Credit Counseling, or hire an attorney.
According to the nonpartisan Urban Institute, borrowers facing foreclosure are 60% more likely to hold on to their homes if they receive counseling. When you hit trouble, the first step is to see whether you qualify for federal programs that help you refinance your home at a lower rate or reduce your mortgage balance. Be patient. And be prepared for lots of paperwork. The Martins say they have faxed more than 80 pages at a time to their lender.
Sam Hussain of ClearPoint Credit Counseling Solutions in Modesto, Calif., says that people often get frustrated when they have to fax the same paperwork more than once. "That's reality," he says. "Ask for the mailing address, and use certified mail." Hussain also recommends you use a notebook to make a conversation log through the process. Write down the name of every person you talk to, the date you spoke and what was said.
It should go without saying that getting your legal advice from scam outfits that advertise in spam e-mails or on utility poles is a bad strategy. As Lee Jones, a spokesman for the Department of Housing and Urban Development in the Northwest, says: "They fold up in the night like a lawn chair and take your money with them."
It's also good practice to steer clear of well-intentioned people who are out of their field. Taking advice from friends, relatives and even your real-estate agent can be a costly mistake.
A credit counselor or attorney can be helpful if saving your home proves impossible and you seek to complete a short sale or deed in lieu of foreclosure. Keep in mind that banks will want to know that you tried every other avenue first.
How to get help losing your home the right way
A new federal program, Home Affordable Foreclosure Alternatives, encourages banks to accept short sales by offering them financial incentives to do so. It offers sellers incentives, too.
Homeowners win because:
• They won't get stuck with a deficiency judgment. Under the program, homeowners are released from all obligations.
• They can receive $3,000 in relocation expenses.
• They can't be charged any fees to participate.
Creditors win, too, because they don't inherit a vacant home to maintain. As big as the losses in short sales can be, the losses from foreclosure can be even bigger -- by some estimates, as much as 60% of what's owed on the mortgage.
Secondary lenders, who often stand to get nothing in foreclosures, can receive up to $6,000.
You may qualify for the foreclosure-alternatives program if:
• You have tried unsuccessfully to get a mortgage modification through the Home Affordable Modification Program .
• The property is your principal residence.
• You got your first mortgage loan before Jan.1, 2009, and it is guaranteed by Fannie Mae or Freddie Mac.
• You are behind on your mortgage or will be in the foreseeable future.
• You owe no more than $729,750.
• Your total monthly mortgage payment is more than 31% of your income before taxes.
The foreclosure-alternatives program is set to expire Dec. 31, 2012. Some critics predict that it will be as disappointing as the loan-modification program, which was launched in March 2009. Out of millions of distressed homeowners, just 170,000 had received permanent modifications as of the end of February, according to the Department of the Treasury and HUD. (Many more modifications are being offered or are in the trial phases.) The median decline in monthly mortgage payment was about $500.
Will the new program be any better?
"It's half right," says Mary Tootikian, the author of "Stunned in America: Sub-Crime Mortgage Crisis." "The intent of it is good." She worries, however, that the new program's application process will allow lenders to find out borrowers' incomes and assets. "After they go through this fact-finding mission and they find out you have assets to go after, they don't have to let you do a short sale," she says.
Arian-Pace, the Florida attorney, is more optimistic. "The frustration of short sales is the timing of it all, getting banks to approve it," she says. "You often lose the buyer in the process. I'm hoping it's a step in the right direction. Really, it's going to come down to how the banks implement it."
