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How to Avoid Foreclosure, Part 2 of 3

Bart Marchioni, Realtor at Keller Williams Realty - Silicon Valley

May 19th, 2008 · 5 Comments

After a writing hiatus, I’m back! It’s been a crazy spring. As a Certified Foreclosure and Short Sale Specialist, I’ve been very busy consulting with homeowners and working with them to avoid foreclosure. Every day, I’m talking with people who are facing the prospect of losing their home.

In part 1 of this 3-part series, I talked about the options a homeowner has to keep their home. In this part, I’ll discuss the three options that allow them to get out of the house and out from underneath their loan.

The first option is a conventional sale. This obviously is only an option for homeowners who have equity in their homes. It’s not out of the question that someone may have an adjustable rate mortgage which is going to reset soon, or recently has, and is too much for them to afford. In this case, if the homeowner has enough equity to afford the costs of selling a home (which can commonly totals 7% of the sales price), including title insurance, escrow fees, brokerage commissions, county taxes, and other miscellaneous fees, then they can get out of the loan through a conventional sale.

The second option is a short sale.  If the homeowner is “underwater,” meaning that the total value of the loans against the property are more than the current market value, then they might be able to attempt a short sale. This involves putting the home up for sale at current market value, and getting the lender to take the loss on the difference. As I discussed in a previous post, “What is a Short Sale?“, this is accomplished by sending the lender a “Short Sale Package” which includes many documents supporting the fact that the borrower can no longer pay their mortgage and must sell the property at a loss to the lender, and the only other alternative is foreclosure. This whole process is best conducted by a Realtor who is experienced in short sales, because the process is long, tedious and complicated. Many agents, in a desperate attempt to get any business they can, are trying to do short sales and not getting very good results.

The third option for getting out from underneath the loan is to simply give the home back to the lender in what is known as a deed in lieu. When a lender foreclosing on a property agrees to allow you to deed the property back to the lender before the foreclosure is complete, it is called a “deed in lieu of foreclosure.” This can be advantageous to lenders because they get the property back sooner from cooperative homeowners which mitigates their losses. It can be advantageous for a homeowner because they may have less damage to their credit and they can move on with their lives without a stressful foreclosure hanging over your head. This option is usually not available if there is a 2nd mortgage on the property, because the 2nd mortgage would still be on the title after the deed-in-lieu-of-foreclosure is completed. The only way for the 1st mortgage holder to clear the 2nd mortgage from the title is to proceed with the foreclosure.

As you can see, the most viable option for homeowners tends to be a short sale. Since so many people bought homes over the past 5 years with either subprime loans or simply have adjustable rate mortgages which are resetting to a higher interest rate, it’s no wonder that fully 28% of the 8,592 homes for sale in Santa Clara County are short sales. But as I said, these are no easy feat. It takes an agent with patience, knowledge, skills and training to successfully negotiate a short sale with a homeowner’s lender. In the end, because most agents don’t have this training, a very small percentage of short sales actually close. If you are facing foreclosure, and would like to get out from underneath your loan, don’t let this happen to you - talk to an agent who has experience closing short sales. If you need a referral to someone in your area, let me know. If you live in Santa Clara County, and would like to discuss your situation, give me a shout - I’d be happy to help in any way I can.

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