Dear Sue,
I have an adjustable-rate mortgage. The interest rate is due to adjust in 60 days. My mortgage payment will go from $1,900 to $3,000.
When I agreed to this mortgage it was part of an overall plan to get me in the market and then refinance at a later date. Was it Bob Dylan or John Lennon who said, “Life is what happens to you while you’re busy making other plans”?
As you know, a lot of life has happened in recent months. I am not in the same position that I thought I would be in.
Since I am now in a negative equity position that I didn’t anticipate, and don’t have a Fannie Mae or Freddie Mac loan, there is no way I can refinance and I sure as heck can’t afford the new monthly mortgage payment.
I am being bombarded with advice from my family, friends and co-workers. I really don’t know where to turn.
Should I walk away even though I am current on my mortgage payments and let the bank foreclose on me? Should I do a deed in lieu of foreclosure, or should I do a short sale?
Please help.
~ Desperate Diane
Dear Diane,
It is important for you to understand that 50 to 70 percent of the real estate transactions taking place in America are distressed — either foreclosed upon or sold short.
Many people never thought they would be in their current situation. Their decisions were made based on an appreciating market. The present declining market has put a wrench in many American’s plans.
First don’t waste any time. Immediately notify your lender of your upcoming dilemma. Let them know that it is impossible for you to continue your obligation when your loan adjusts.
Ask them to work with you. Find out if you can negotiate a loan modification. Ask your lender if it might be possible to keep the interest rate where it is as a way to avoid a foreclosure.
If they refuse, which some of them have, seek the advice of a good real estate and tax attorney.
Because you are current, they will probably advise a short sale over a foreclosure, unless you can negotiate a deed in lieu of foreclose without any strings attached.
You want your lender to allow you to deed the property back to them without a negative credit reporting. Believe it or not it is possible.
I worked with someone that deeded two properties back and neither one of them showed up on their credit report.
Overall, when considering what to do with a primary residence, a short sale offers at least four advantages:
• Credit. A foreclosure has far more negative impact than a short sale.
A foreclosure remains on one’s credit report for seven to 10 years, while a short sale reporting remains for two to five years.
If the seller in a short sale is current on payments, as in your case, he or she can sometimes qualify to buy another home immediately.
• Control. Home sellers that choose a short sale control the entire selling process from pricing, to the timing and closing of their homes. It’s a much more palatable option than the dreaded foreclosure with the inconsistent time-frames and conspicuous postings on the front door.
Short sale sellers can often control the outcome by getting the lenders to waive any deficiencies in recourse loans. In other words, the lender can be persuaded to agree in writing not to go after the seller for the difference between the loan amount and amount that was paid.
• Minimize Losses. In a short sale, lenders avoid the legal and management costs associated with the foreclosure process. Since short sales net approximately 20 percent more than foreclosure sales, it makes sense for lenders.
The higher price is better for the community as a whole.
Abandoned and deteriorating foreclosures have become blight in many neighborhoods. Communities maintain higher values when the homeowner stays in and maintains the property during the short sale process.
• Taxes. According to Tony Graupensberger, a local real estate and tax attorney, there is no federal or state tax due on the short sale of one’s primary residence.
President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007, providing relief from debt forgiveness taxation for certain occupants until December 31, 2012. I would suggest that you call Graupensberger or your lawyer to determine if you are exempt from taxation.
Knowing the four reasons — credit, control, loss mitigation and tax relief — and of course seeking the advice of a good tax and real estate professional, is a matter of good Home $$$s and Sense.
Sue Thompson is owner and sales manager of HomeTown Realtors. She can be reached at seesue@seehometown.com, or on the Web at www.homedollarsandsense.com.
