First, read the other article on this site, "If You Are Facing Foreclosure" to get a feeling for the urgency, seriousness and inevitability of foreclosure for those with little equity and/or negative cash flow.
With the slow down in sales and the dropping of home prices, your property will never be worth more (in this market cycle anyway), than it is right now. In fact, by the time you read this, it will already have fallen in value.
If you have little equity in your home, or if you have investment property which has little equity and/or negative cash flow, YOU MUST SELL NOW! Otherwise you will be foreclosed on, it is as simple as that.
If you choose not to sell, you must save or raise cash as quickly as possible. Do not, I repeat, do not use this cash to pay down your mortgage! Here is why:
Let's say you have a new $300,000 mortgage at 6.5%. You are alarmed at the prospect of foreclosure because you have maybe $10,000 in equity. You manage to accumulate $10,000 over the next year and on the advise of your financial advisor you send that in to pay down your loan. The balance falls from, let's say, $290,000 to $280,000 but your payments of $2,000 month remain the same, of course.
You are laid off. You miss 3 payments and the bank is threatening foreclosure. You explain your situation and further assert that you just sent them $10,000 in advance! They thank you for the advance payment and explain that that has no bearing whatsoever on future payments. If you miss one more payment, they will start the foreclosure action. Unless you can come up with that next payment, you will be SOL even though you will probably be able to find another job within the next six months or so. At that point, they will no longer accept payments from you.
OR, same scenario except you do Not send in the $10,000 advance payment, you keep it in your bank. When you reach the 3 missed payments, the bank threatens foreclosure. You explain your situation, that you will probably have another job in the next six months and you would like to work a reduced payment plan. The bank agrees to a payment plan of $1,000 per month for the next 6 months, with the balance added to the end of the loan, instead of throwing you into foreclosure. Your home is saved!
Also, if you have more than one mortgage on your property, if you have cash, you may be able to make a deal with a second mortgage holder if you get in trouble. A second or third mortgage holder will probably be wiped out if the first mortgage forecloses. Should it be the 2nd mortgagee that is foreclosing, he would still be in a weak position because after the foreclosure, he would have to make up any arrears on the first and then take over paying the first mortgage until he could sell the property. And in the most likely scenario, the house would probably not be worth as much as the first mortgage anyway. So the second mortgage is in deep DO, and he knows it.
You could probably buy out the second mortgage for literally pennies on the dollar, if you have the cash to pay the discounted amount immediately. By buying out the second, you have increased your equity and with it the possibility of now selling it or then making a deal with the first and riding out the storm.
If you cannot accumulate the extra funds, (and most will not) and find yourself in foreclosure, unable to sell your home, there are still measures you can take.
First try to get the bank to take a deed in lieu of foreclosure. This means the bank agrees to let you off the hook for any deficiency that might arise if they have to sell the property for less than the mortgage amount in return for your handing over the deed to them immediatley without any further legal battles or costs. However, if you have 2nd mortgages or other liens against your house, the bank will not go along with this because they will be stuck with paying them.
If the deed-in-lieu is not available to you, you Must file bankruptcy! There are two types of bankruptcy generally available to the private individual, Chapter 13, the wage-earners bankruptcy and Chapter 7, liquidation. With a Chapter 13 you can theoreticallly keep your house, although it is a long shot. All of the mortgage arrears are added to your other payments to be paid off in 3-6 years, while keeping scupulously current. This ofter reulsts in greatly increased monthly payments. If you weren't able to keep up with your regular mortgage payments...Fewer than 1 in 3 Chapter 13's are completed successfully. Then you are left with a bankruptcy and a foreclosure on your record!
A Chapter 7 will not allow you to keep your house.
If you have no prospects of being able to afford the house in the future, you must file a Chapter 7 bankruptcy BEFORE the bank sends you a lis pendans or Notice of Default which is the official foreclosure notice which starts the clock for the foreclosure sale. This will not prevent the loss of your house but it will prevent the bank from coming after you for any deficiency if they cannot sell the house for the amount of the mortgage and all the additional fees they will heap on it.
If you recall from reading the article, "If You Are Facing Foreclosure" on this site, the bank can come after anything you owe, including garnisheeing your salary and seizing your bank account to make up this deficiency. The nightmare may not end there. If the bank cannot collect the deficiency from you, they will report it to the IRS. The IRS regards "forgiveness of debt" that you were contractually obligated to pay as INCOME! You will then receive a bill from the IRS for tax, due in cash with your next return, on the amount of the deficiency. Filing a bankruptcy before the bank sends its Notice of Default will prevent them from writing off the deficiency which means they are stuck with it and the IRS will not come after you.
This is a good point to threaten them with if they are resisting working out a payment plan you can live with.
I'm sorry to say, there is more bad news. Even if the bank allows you to sell your house to a person for less than the total amount owed on the mortgage, (also called and Offer in Compromise) you would still be subject to a the IRS for taxes on the shortfall, Unless you declared bankruptcy first!
This is serious stuff. Either sell your house now if you feel you are at risk, save up some extra cash or find someone or organization such as our Trust, that will take over your property and all its payments at full market value so you don't lose anything. They will also assume payments if the amount of the mortgage exceeds the value of the property! It is the easiest, cheapest alternative to get you free from a big problem.
If you would like to explore this option complete the Offer Form. Depending on where you are in the foreclosure process, in Maryland we may be able to refer you to a qualified Foreclosure Consultant that can help you with your situation.
Good Luck!
Craig Cherry
Dreaming Bear Home Solutions LLC
