A Short Sale Might Be Your Best Option
In the wake of the current financial crisis and economic downturn, many home owners find themselves in a difficult postion, and many are having trouble making payments or have even lost their homes. Orange County home owners have several options when making the mortgage payment becomes an impossible burden. Some of the most common are Loan Modification, Deed in Lieu of Foreclosure, Short Sale, and Foreclosure.
Loan Modification
In theory, Loan Modification is an excellent option. If the bank agrees to modify the terms of your loan in such a way that you can afford the payments and keep your home, then it's a win-win for everyone. Unfortunately, the reality is not as good as the theory. Banks are overwhelmed with requests, and it can take months to get a response - which might be a rejection. There are hundreds of companies offering Loan Modification services for a fee, but many of them are unscrupulous opportunists. The fees are large, and there is no guarantee of success. Finally, even if your modification is successfull, there is a real danger that you still won't be able to afford the new payments. 50% of all Loan Modifications result in a payment reduction of less than 10%, and 58% of mortgage holders default within eight months of a successfull modification.
Deed in Lieu of Foreclosure
Under some circumstances, a lender will accept the property back from the borrower as full payment of the loan. The lender may be willing to do this because it saves them the time and expense of going through the foreclosure process.
It is not aways simple to convince the lender that it is in their best interest to accept title to the property as payment in full on the loan. It requires a complex, detailed analysis to convince the lender of the actual “fair market value” of the property, and that the borrower cannot afford to make the payment.
A Deed in Lieu of Foreclosure may be a preferable option to foreclosure for various reasons - faster resolution of the matter, less stigma and credit impact than foreclosure (4 years per Fannie Mae guidelines), and so forth. There are pitfalls and complex legal issues to consider, so if it is strongly recommended that you consult an attorney before taking this path.
Short Sale
A Short Sale is a transaction in which the lender agrees to a sale of the home where the proceeds are not sufficient to fully pay off the mortgage(s) - a "short pay". The borrower must be able to show the lender a true financial hardship, and convince them that the actual market value of the home is less than the loan balance.
A Short Sale can be preferable to the home owner because, although the negative credit impact is large, it may not last as long as would a foreclosure. Fanny Mae guidelines allow for the purchase of another home as soon as 2 years after a Short Sale.
A Short Sale can be a lengthy process. It can take 2 months or more for a lender to respond to a Short Sale application, and weeks or months more to negotiate the sale once thay have approved in principle. This means that the sooner a home owner decides to attempt a short sale, the more likely it can be completed before the 7-month foreclosure clock ticks down.
The most important thing for a home owner considering a Short Sale to do is to get expert professional help. Consult an attorney about the options and the particular circumstances of your situation, and hire a Realtor with the experience and expertise required to successfully negotiate the best possible outcome for you.
Foreclosure
Foreclosure is not really an option, but the unfortunate result when no other options are available. A foreclosure will negatively impact the borrower's credit for up to seven years. The process is long, complex, and stressful. Boiled down to the bare essentials, when a borrower stops making payments on a home loan, the lender will begin a process of several legal steps. In California, a "Notice of Default" is an official notification that the borrower has defaulted on the terms of the loan. Banks typically file an NOD when the borrower is 90 days late on payments. After filing the NOD, the lender must wait at least 90 more days before the next step, which is the filing of a notice of a Trustee's Sale. The lender must then wait another 21 days before the actual Trustee's Sale, where the home is put up for sale in a public auction. In today's market most homes to not sell at auction, and become the property of the bank. The home will eventually be marketed as a Bank Owned home or REO. All told, the typical minimum time to complete a foreclosure in California is about 7 months, and can even be longer. It is a very expensive and time consuming process for the bank, which is why they will often consider a Short Sale.
