Published in The Times Reporter Newspaper, New Philadelphia
Real Estate Weekly Section; March 17, 2007
Today, obtaining a loan to purchase a home is common place. When obtaining the loan from a lender, the lender typically secures repayment of the loan by obtaining a mortgage on the home. Whenever the homeowner fails to pay on the loan, the lender, by virtue of the mortgage, has the ability to foreclose on the home through the court system and ultimately sell the property through the sheriff of the county in which the home is located. The time for this process varies and can take up to eight months in some cases, and as little as four months in others. All too often when faced with the foreclosure papers, homeowners simply give up and abandon their property. However, what homeowners fail to recognize is that simply because they lose their home to foreclosure, the loan obligation does not necessarily go away. Rather, the lender still maintains the right to pursue the homeowner for any deficiency between the proceeds received in the sheriff’s sale and the balance of the loan. As a result, a homeowner could lose their home and still owe their lender money, this is referred to as a deficiency judgment.
As interest rates continue to rise, those with variable interest rates have noticed a sharp increase in their monthly house payments. The increase in monthly payments may also be the result of increasing property taxes. As a result, sometimes it becomes clear that homeowners simply cannot afford their home. It is important to avoid foreclosure, as the foreclosure can remain on your credit report for up to seven years and potentially result in a deficiency judgment. Homeowners faced with this situation have several alternatives to avoid foreclosure.
Homeowners desiring to keep their home may attempt to seek relief through bankruptcy in an effort to temporarily stop the foreclosure action and reach a repayment plan with the lender. For those homeowners desiring to avoid bankruptcy and foreclosure, you can attempt to sell your home prior to the foreclosure action. Typically, several months will pass before a sheriff’s sale will be held, and therefore, homeowners may have time to sell their home and avoid the foreclosure. Many homeowners in foreclosure will receive calls from hungry real estate investors and may be able to work out a quick sale to avoid foreclosure. When attempting to sell your home, it is important to obtain a payoff from your lender in order to determine what price you are able to sell. In the event that your loan exceeds what you are likely to obtain from the sale of your home, you can attempt to negotiate with the lender to work out a short sale. A short sale occurs when a home is currently in foreclosure, but the lender is willing to release their mortgage for less than the outstanding loan balance. After the transaction, you will have sold your home to a third party and your loan will be satisfied, assuming the lender agrees. The benefit of a short sale is that it allows you to avoid bankruptcy, foreclosure and prevent the possibility of a deficiency judgment being issued against you. Note there is no guarantee that a short sale will prevent a deficiency judgment, so it is important that you work with an attorney in attempting to negotiate a short sale.
Sometimes homeowners are unable to sell their home or feel that the chances of selling their home prior to foreclosure are unlikely. As a result, a homeowner may attempt to execute a deed in lieu of foreclosure. By executing a deed in lieu of foreclosure the homeowner transfers the property back to the lender and avoids the entire foreclosure process. Typically, the deed will contain terms which prevent the homeowner from being liable for any deficiency judgment in exchange for transferring the property back to the bank.
In order to attempt any of the resolutions discussed above it is important that you work with your lender immediately upon falling behind in your payments. Contrary to popular belief, financial institutions do not like to foreclose on properties. Rather, they would simply prefer to have all of the payments made according to the loan agreement. It is also important to work with a licensed attorney when attempting to negotiate with a lender. An attorney can assist in protecting your interests when negotiating with the lender.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.
If you have any questions about this article, feel free to contact KWGD at 330-497-0700.