Short selling a home accomplishes the two fold goal of getting a borrower out from under a defaulting mortgage and a home that is headed for a foreclosure sale. The short sale does adversely affect the borrower's credit; however, short sales will not nearly wreak as much havoc with the credit rating as an actual foreclosure! When negotiating a short sale option, the mortgage lender agrees with the borrower to accept less money in lieu of full payment. It is at the lender's discretion to approve of short selling the property or deny the request. When the bank won't accept a short sale, the borrower is once again facing foreclosure, a defaulting mortgage, and of course the headaches, heartaches, and finally the fiscal ramifications.
There are alternatives to a short sale, and they do not have to include foreclosure!
Deed in Lieu of Foreclosure – When the Borrower is not Upside Down in the Loan
Tom owes $100,000 on his home. He has it appraised and the value is said to be $100,100. Tom has lost his job, fell behind on his mortgage payments, and he knows that there is no way he is going to pay his mortgage anymore, much less make up any arrears. He knows he will head into foreclosure. Tom contacts the bank and in writing offers a deed in lieu of foreclosure.
In this scenario, the borrower writes over his deed to the real property secured by the mortgage to the lender. He is in default with no fiscal means of either curing the default or continuing on with monthly payments. The borrower is not upside down in his loan, since the fair market value is slightly higher than the actual indebtedness to the bank. HUD points out that the entire process will be completed in less than 90 days.
Lease Your Home – For a Temporary Reprieve from Mortgage Payments
Dick cannot make his house payments anymore. He did not lose his job but the mortgage is just too much right now. He knows he is headed for default and foreclosure. At the same time, he cannot sell the home right now because the amount owed and the fair market value is too close for comfort. So he invites Jane to lease the home from him.
Jane needs a place to stay and wants the tax advantages, but her credit is not good enough to cut the mustard with most banks. Dick leases his home to Jane for a few years, and Jane takes over the payments. Dick gets back on his feet (financially) and when Jane turns the house back over to him he is prepared to make the payments.
The dangers of this arrangement are obvious: the lessee could default on the loan, and the lessor now faces foreclosure and a loss of the property. On the other hand, with a trusted lessee this has the potential for saving a home and a credit rating, while helping someone with a short term housing need live in a nice property. There may even be some tax advantages for the lessee, as some realtor examples show.
Make Your Mortgage Insurance Work for You
Harry is delinquent on his mortgage. He previously lost his job and his finances went to hell in a hand basket but now he found another job and he makes more money than before. The mortgage he has on his home is an insured mortgage. Harry contacts his mortgage lender and requests help in getting an interest free loan from his mortgage guarantor to make up for the default.
According to the FHA, the money paid into mortgage insurance when obtaining a loan can actually be put to good use. If a mortgage is headed for foreclosure and is more than four months past due, a borrower who can show that he is able to resume regular monthly mortgage payments may apply to the mortgage guarantor for a loan. This is a one time occurrence and the funds borrowed are to be used only to cure the default that currently exists.
Sources:
http://www.hud.gov/offices/hsg/sfh/nsc/faqdil.cfm
http://catherine.vflyer.com/13/index.html
http://portal.hud.gov/portal/page?_pageid=73,1827665&_dad=portal&_schema=PORTAL
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