If you can't afford your house anymore, financial expert Danielle Hoston gives you your options.
Financial expert Danielle Hoston: If you don't already know the difference between a foreclosure and short sale and the consequences of each, you need to read this.
I have been selling investment real estate for nearly eight years. During my tenure, there have been at least seven glorious years of happy sellers, happy buyers, and rising values. Markets adjust, however, and a new day has arrived. There are both consequences and opportunities. Being educated about your options is the key to making the best decisions possible with your money and coming out ahead in the long run.
What is a foreclosure? A foreclosure occurs when a lender pursues ownership of a property after a borrower defaults on their mortgage payments. The processes are different in every state but lenders generally notify the borrowers of their intent to foreclose and give the borrower the opportunity to catch up on missed payments and fees. Once that opportunity expires, the lender takes possession of the property.
How it affects the homeowner: If you are in the process of a foreclosure, you need to seek professional legal and tax advice immediately in order to make sure you are allowed all of the rights available to you and minimize future expenses. You may still owe capital gains depending on how long you've owned your home. Foreclosures are generally reported on your credit report for up to seven years.
BEWARE!!! Once your payments go in default, you will be contacted by a variety of companies and/or individuals looking to collect large sums of cash from you to "extend your foreclosure" or buy your property in exchange for a small sum of cash. Please contact a real estate professional to get an idea of your current market value and the options available to you prior to accepting any deal.
What is a "short sale?" A short sale occurs when the lender of a property accepts a discounted payoff on the existing mortgage. The seller of the property may or may not be in default on their payments but the total mortgage owed is generally higher than the current market value. Short sales require the patience of both the seller and the potential buyer as they can take up 4-6 months to complete.
How it affects the homeowner: Arranging a short sale with your lender can delay the foreclosure process or avoid it altogether. Short sales are commonly reported on your credit report as "settled" (which is still negative) and the remainder is written off as a loss by the creditor. In prior years, any remaining balance was considered income and the homeowner was taxed accordingly. More recently, the tax code was temporarily amended to waive this tax. As always, consult a tax advisor to ensure that this amendment applies to you.
What are "REOs?" "Real Estate Owned" (REO) properties are already owned by the lender and were not previously sold at auction, if held. Lenders are oftentimes the best sellers because they generally respond quickly and wish to sell the property as soon as possible. REOs provide well-qualified buyers with at least 20% down terrific opportunities to buy properties at a great price.
My advice to any homeowner in default is to actively work with your lender and find a way to pay back your mortgage. In today's economy, lenders are negotiating very favorable loan modifications in order to avoid the heavy expense of foreclosing. If a loan modification is unavailable and you still cannot afford your mortgage, pursue a short sale immediately. On the other hand, if you are fortunate to be in a position to buy, there are plenty of REO opportunities available that will position you for great increases in value when the market rebounds. Contact a real estate professional immediately to help you find what you're looking for.
When do you think the real estate market will rebound? Is it still going down?
|Danielle Hoston is a business and finance expert with Hoston and Associates. She is the mom of one and resides in Los Angeles.|