KNOW YOUR OPTIONS
Whether you are trying to remain in your home long term or you are simply looking to walk away without liability, there are a number of options and alternatives available to you. Many of these options can greatly minimize the negative impact to your finances and reduce or eliminate your exposure to taxation and deficiency liability. However, each of them carries significant financial, legal, and tax implications that you must understand in order to protect yourself from further harm.
While many people will profess to have the answers you are looking for, very few have the skill, training, education and legal authority to evaluate your situation and provide the advice and counsel you need. It is illegal for anyone other than a licensed attorney to give you legal and tax advice, yet everyone from real estate agents to loan mod “experts” are dispensing highly questionable advice or even complete falsehoods to gain your trust and your money.
As a California Real Estate Attorney and Licensed Realtor®, I have extensive experience in real estate law, brokerage, taxation, litigation, bankruptcy and residential lending which makes me uniquely qualified to answer all of your questions and provide specific guidance and counseling about your options at no cost to you. Please review the following list of options, and call us today for a comprehensive analysis.
OPTIONS FOR HOMEOWNERS FACING MORTGAGE DEFAULT
Do Nothing/Sit & Wait (a “Planned Foreclosure”)
One option that we don’t advise: Doing Nothing. If you stop paying your mortgage and take no other action, the lender will commence or continue the foreclosure process. Your home will be sold in a public foreclosure auction and the lender will then evict you from the property. Your credit will show the foreclosure and you will be required to report the foreclosure on all future credit applications. If you have a foreclosure on your record, you will not be able to get another mortgage from most lenders for a period of 5 to 7 years. Also, if you are evicted from the home, your ability to rent will be seriously affected. Most banks take about 8 months to complete a foreclosure and evict the homeowner after a mortgage default. Please see the Foreclosure Timeline at www.LawyersRealtyGroup.com for a more detailed evaluation of how foreclosure works.
Doing nothing is almost always a very bad idea. It can expose you to taxation and deficiency liability. ONLY A REAL ESTATE ATTORNEY CAN EVALUATE YOUR LEGAL AND TAX EXPOSURE. That’s why it is crucial to have an Attorney/Realtor® analyze ALL your options shown below before you make ANY DECISIONS or sign ANY DOCUMENTS (including a listing agreement).
Options To Keep Your Home:
If you want to keep your home long term, you will need to find a way to address the default and the ongoing mortgage obligation. There are a number of scams and frauds being marketed to people in foreclosure which claim to wipe out your debt or to sue the bank to allow you to stay in the home. Please read our Consumer Warnings article for the latest information. No matter what you may hear, no one is able to wipe out the debt. To keep your home, you must find a resolution to the default and past due amounts AND you must be able to afford the mortgage going forward. Here are ALL the options if you wish to keep your home:
If you are current on your mortgage, you can keep paying even if your property value is below your loan balance. The question is whether it makes financial sense to keep paying and, if you stop, what liability you may face. Call me directly to determine your exposure to liability if you stop paying and what we can do to get rid of that liability. There is no charge for this evaluation or my time. Only an attorney can evaluate your loan to determine if it is recourse or non-recourse. Do NOT trust a real estate agent to make this determination. It is illegal for them to even discuss the issue unless they are also a licensed attorney.
Cure Default and Keep Current (“Reinstatement”)
You have a legal right to cure your default. In California, you can cure your loan default at any time up until 5 business days prior to the foreclosure date. You must notify the trustee in time to get an accurate reinstatement amount and arrange delivery of the funds. Please call me and I can explain how a reinstatement works. There is no cost for this advice. If you cure the default, you would then need to stay current on your mortgage to keep your home.
If you have substantial equity in your home (i.e. the property value exceeds the mortgages), you might be able to get a new loan to pay off the current loan that is giving you trouble. This option will only help if current interest rates are substantially lower than the interest rate on your mortgage. Additionally, some borrowers have interest-only or negative amortization loans which have artificially lowered payments. A new loan, which probably would not have this feature, will be of little help to a borrower in distress because the new payments might actually be higher than the old payments. Finally, most borrowers who are having difficulty paying their mortgage are also victims of the severe decline in real estate values and simply don’t have any equity in their home or they have missed many loan payments and are in default. A refinance is not available to those borrowers.
If you are at least 62 years old and have equity in your home, you may be able to get a “reverse mortgage” which would allow the current loan to be paid off without having to make future payments. A reverse mortgage requires significant equity in the home because the loan-to-value limitations are more onerous. Therefore, both refinances and reverse mortgages are available in very limited circumstances and are not viable options for the vast majority of borrowers.
If you are in default, but have the ability to make payments, you can negotiate a 1 – 2 year repayment plan with your bank to catch up on all past due amounts by adding an extra amount to your current mortgage payments. The bank has no obligation to work with you on a repayment plan, but if you have a viable plan to get them paid current, they will listen.
If you are facing a temporary hardship that you expect to recover from quickly, your lender might be able to forgive or defer certain penalties and fees in order to allow you to recover and eventually re-commence making your regular payments. In some cases, the lender will provide a suspension of payments for some period (generally three months). However, your payments can actually increase after you have recovered from your hardship because you will need to “catch up” from the period your loan was in forbearance. You will need to document your hardship and be able to prove that you expect to fully recover at some point. For borrowers facing a long term hardship, a forbearance is simply not an option.
If you fit within the narrow window between an affordable “front-end” debt-to-income ratio and the Net Present Value test, you might qualify for a modification of your loan. A modification works by applying one or more of the following:
- Reduction in the interest rate (or locking in a variable interest rate)
- Extending the term of the loan (payments are spread over a longer period)
- Reducing principal (or putting some principal on the back of the loan)
- Adding past due amounts to the ‘back of the loan’
Please see www.LawyersRealtyGroup.com for the free Loan Mod Traffic Light tool which will analyze whether you qualify for a modification. You can also review the article “Understanding Loan Mod” on our website.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is really a workout plan. The clear benefits of a Chapter 13 are that it immediately stops a foreclosure and allows you to propose a repayment plan to keep your home. A Chapter 13 bankruptcy will allow you to repay your past due mortgage amounts along with all your unsecured debt (like credit cards and medical bills) over a 3- to 5- year repayment period. You must be able to pay your current mortgage payments going forward while you also make payments on your 3- to 5- year payment plan. The bankruptcy court cannot modify the terms of your mortgage loans, but you might be able to remove a second mortgage and have the whole amount included in the repayment plan with other past due or unsecured amounts. Please search for “Bankruptcy” on our website for more information.
Options To Leave your home without liability (and maybe a cash incentive):
In situations where you can’t utilize any of the options to stay in the home OR where you’ve decided it is no longer financial viable to do so, the following options may be available as an alternative to foreclosure. These options affect your credit rating less than a foreclosure and may provide other significant advantages like more time in the home and a cash incentive upon moving. You should never simply walk away without exploring these options. Call me to explore the legal, tax and credit issues raised by these options. Only and Attorney/Realtor® can legally review, analyze and evaluate your situation.
Sell the Home in a “Regular” Sale (even during foreclosure)
If there is sufficient equity in your home, you can sell it to pay off all the loans and other liens, and receive the cash from your remaining equity. Even if the home is in foreclosure, you have the legal right to list and sell your home. We have helped many people stop the foreclosure process so they could sell the home and get their equity out before the market collapse further. You need to list your home with someone who can show the buyers that you are serious. An Attorney/Realtor® indicates to all buyers that they are not wasting their time making an offer on your home and that you will not allow a foreclosure to occur.
Assumption (sell ‘subject to’ current liens)
With this option, you would sell your home to someone that would take the property “subject to” the outstanding mortgage loans and other liens. The buyer would then need to pay all the mortgage payments or else the property would go back into foreclosure. This approach has very limited application in the current market. Anyone suggesting this option should be questioned extensively about their motives. It could be a scam or outright fraud. Call me immediately to discuss the facts; there is no cost or obligation to you for the review and analysis.
Deed in Lieu of Foreclosure (a “walk away”)
If you can’t afford the mortgage payment and your property has no equity, you might consider a deed-in-lieu of foreclosure (a “Deed-in-Lieu”). In a Deed-in-Lieu, you agree to transfer title to the lender and turn over the property instead of forcing the lender to go through the foreclosure and eviction process. A Deed-in-Lieu almost NEVER happens in Southern California. The issue with a Deed-in-Lieu is that the lender receiving the Deed-in-Lieu takes the property subject to all other liens and encumbrances (even if those other liens and encumbrances are subordinate and junior to the loan). That means if there is a second loan on the property or outstanding judgments, the senior lender taking the Deed-in-Lieu would take the property with all those items still outstanding against them as the new owner (which could then lead to a new foreclose on the lender taking the Deed-in-Lieu). No lender would ever agree to that outcome. Therefore, the lender would require YOU to pay off all those liens! That simply is not going to happen. Further, almost every bank that we deal with requires the homeowner to attempt a short sale before they would even consider a Deed-in-Lieu.
Short Sales have become the most popular and most successful alternative to foreclosure. A short sale occurs when your lender(s) agrees to let you sell your home for an amount less than the outstanding mortgage balance (the proceeds of the sale are “short” of a full loan payoff). Your lender’s approval is required because it has a secured lien on your home that must be released to allow for the transfer to the buyer. In a “regular” sale the mortgage would be paid in full and the lien would be released, but in a short sale, there isn’t enough money to pay off the mortgage. Therefore, without approval from the lender to release the lien “short” of the full payoff, the sale wouldn’t be possible.
You stay in your home during the short sale process. So long as you show steady progress, the foreclosure will be postponed to allow for the completion of the short sale. We focus our legal attention on the foreclosure process and postponement processing. Almost all banks are now offering a cash incentive to the homeowner for cooperating in a short sale. You will be released from all liability once the short sale is completed. A short sale transaction is not only a real estate transaction, it is also a legal settlement of your mortgage default and a settlement of your loan. In order to have full and complete protection during a short sale, you must work with an Attorney/Realtor®. There are serious legal, tax and contract issues in every short sale, and real estate agents are not trained or licensed to deal with these issues.
Chapter 7 Bankruptcy followed by Short Sale
A Chapter 7 bankruptcy completely wipes out almost all debt and will relieve you from all deficiency liability and cancelation of debt taxation on your mortgages (i.e. no need for the Mortgage Forgiveness Debt Relief Act of 2007 – no matter what any real estate agent may tell you).
Although you are given a “fresh start” through the cancellation of your debts, the bank’s mortgage will remain as a lien on your home. The filing of a bankruptcy case will TEMPORARILY stop a foreclosure (under the “automatic stay”), but the bank can recommence that foreclosure within 3- to 5- months. The only way the bank can recommence foreclosure is if the case is closed (through dismissal or after discharge) OR if the lender files a motion for relief from the automatic stay. If the bank aggressively seeks that motion, they could be back at foreclosure in 3 months. If they don’t file that motion, you would have 5- to 6- months in the home. However, if you have an Attorney/Realtor® working on your behalf, you can combine the time and protection afforded by a Chapter 7 bankruptcy with the additional time and cash incentives of a short sale. We specialize in this approach and can show you how to stay in your home for a year or more. Additionally, we work with your current bankruptcy attorney in this plan. We do NOT need to file your bankruptcy for you to take advantage of the BK/Short Sale combination.
The key is to have a vigilant representative watching your bankruptcy case so that you know when to deploy the short sale strategy that will further suspend the foreclosure. Regardless of whether we process your bankruptcy or you already have an attorney, Lawyers Realty Group will track the bankruptcy process and watch the bank’s actions. We will receive electronic notices of all bank activity and will know if we need to move to the second phase of extending your time in the home.