Dallas Morning News
Monday, September 24, 2007
In a perfect world, homeowners having trouble paying their mortgage would contact their lender immediately to try to work something out.
But it doesn't always work that way, and sometimes their situation becomes so desperate that they can no longer afford their home.
In that case, there are two options to stave off foreclosure: a "short sale" and a "deed in lieu of foreclosure."
Both have tough, heartbreaking effects: You'd have to give up your house.
In a short sale, you sell your house for less than you owe on your mortgage, and your lender agrees to write off the portion of your mortgage that exceeds the sales price.
"We try to avoid it, but sometimes that's all that's left," said Craig Jarrell, president of the Dallas region of Pulaski Mortgage Co.
In a deed in lieu of foreclosure, you agree to transfer the title of your home to your mortgage company in exchange for cancellation of your debt.
In most cases, you must try to sell your home for its fair market value for at least 90 days before a lender will agree to this option.
I've said it many times – you don't want your mortgage problems to get to this point. If you know you'll have trouble making your mortgage payment, contact your lender immediately.
Many borrowers mistakenly believe that contacting their lender will hasten foreclosure. Most lenders would rather find a way to keep you in your home than to have to take back the house and deal with the headache of unloading it.
"We want to work with the borrower as soon as possible," said Robin Stout Migala, senior delinquency resolution manager at Freddie Mac, the giant mortgage finance company that buys loans from lenders and repackages them into securities to sell to investors.
In an effort to reach borrowers earlier, Freddie Mac has an early-intervention program in which consumer credit counseling agencies in San Francisco and Atlanta contact borrowers in the early stages of delinquency to help them try to find a way to keep their homes.
Think of it this way: If you're 30 days late with your mortgage payment and you contact your lender, you'd only have one mortgage payment to make up.
"If you call us when you're 120 days late on that loan, where are you going to come up with four months of mortgage payments?" said Amy Crews Cutts, Freddie Mac economist.
If your situation is too far gone, you may have to look at a short sale or a deed in lieu.
"We would much rather do that if you have close to the amount due," Ms. Cutts said. "We would much rather do a short sale than drag you to court and do all that crazy stuff. Why ruin your good name if we can do better than that?"
Housing analysts expect to see more short sales as more homeowners can't sell their home for more than they owe on the mortgage because of falling housing values, Ms. Migala said.
At least one company sees a business opportunity in short sales.
Southlake-based 1-800-CashOffer has launched a service that helps home sellers and real estate investors process and negotiate short sales with mortgage companies.
"We've just been flooded with interest about short sales," said Dev Horn, vice president and general manager.
The Dallas-Fort Worth area hasn't had many short sales because it hasn't been hit as hard as Florida, Nevada, California and other areas that have seen home values plummet.
Indeed, Moody's Economy.com, a research firm, said that although it expects more than three-fourths of U.S. housing markets to suffer drops in prices, the Dallas area will continue to see modest gains in median home prices.
As for deeds in lieu of foreclosure, few of them take place in Texas because of the state's short foreclosure timeline, Ms. Migala said.
In Texas, a notice of a pending foreclosure must be posted no later than 21 days before the scheduled foreclosure sale.
In cases of both a short sale and a deed in lieu, the IRS may tax the amount of debt that's forgiven.
Your credit report will take a hit from a short sale or deed in lieu, but both are better than having a foreclosure in your credit history because a short sale or a deed in lieu tells creditors that you've worked with the lender to stave off foreclosure.
"Having a foreclosure on a credit report is a disastrous thing," Ms. Migala said.