Denied short sale, struggling homeowners look for way out
Will filing for bankruptcy get lenders off their back?
By Ilyce Glink, Friday, May 16, 2008.Co-written by Samuel J. Tamkin
Inman News
Q: We have lived in New Jersey for five years, and have been waiting for an opportunity to go back to Florida. My husband recently got offered a job in Florida that will pay $30,000 less than what he makes now. He will start his new job in mid May and I will follow in when our kids get out of school. We signed a rental for a home in Florida but we can't purchase a home at this time.
The house we currently live in (in New Jersey) is about 2 years old. Houses like ours in our development are now selling for $60,000 less than what we paid. We could do a short sale with our lender, but our credit score is close to 800 and we hope not to ruin that.
Another option we explored was filing for bankruptcy. We met with a bankruptcy attorney and now I feel like that may be our only option. We have two loans on our home and our first lender would accept the short sale but the second would not.
We thought about renting out our home but our mortgage is $3,000 a month and we can expect to receive a monthly rental payment of only about $1,800. We can't afford three payments per month (our two loans on our house and the rent for the home in Florida).
We have been advised to stop paying the mortgage payment. We do not want to do that but we really want to move to Florida. On the other hand, we want to make the best financial decisions and rebuild our credit as soon as we can.
A: You have an interesting situation. Unlike many people with mortgage troubles due to job losses, health problems or other financial difficulties, your situation appears to be self-created.
You know your home value has gone down, and you know you will make less money if you move to Florida now, and you know you can't afford to keep your current home and rent a home in Florida. And yet, you've gone ahead, accepted the job in Florida, and signed a lease for a home there.
What are you thinking? Your life in New Jersey must be pretty horrific if you're willing to file for bankruptcy just to get back to Florida.
You have excellent credit -- now. Unfortunately, going through a short sale or filing for bankruptcy will severely hurt your credit, and you can expect your credit score to drop several hundred points.
A short sale is where you sell your home for less than the amount you owe on it to your lenders. Both of your mortgage lenders would have to agree to take less than the full amount that is owed in exchange for allowing the sale to go forward.
When a home has two lenders, the second lender is in a position to lose all of the value of its loan. In some cases, the second lender may not even respond to the request for a short sale with the hope that it may get something later rather than agree to get nothing now.
If either lender fails to agree to the terms of the short sale, your sale with a prospective buyer will fall through. Make sure you are in good contact with each lender if you decide to go down this route. If you have a good line of communication open with each lender and each lender works with you in the short sale, you have a better chance of selling the property to a buyer that comes along.
You mentioned filing for bankruptcy as another option. Bankruptcy will certainly hurt your credit history -- if you even qualify. Your excellent credit will be shot for years to come and you would have to take steps over the next several years to restore your credit.
With a lower score, you may find that you will have to pay more for car and renters insurance and it may be much more difficult to obtain credit-card offers with low interest rates.
Just because you file for bankruptcy may not mean that you're out of the woods with your lenders. If you have other assets, you may find that your current lenders want a piece of those assets. If you have savings that are not in retirement accounts, you may lose those savings. If you sat down with a bankruptcy attorney, you should have gone through what you own, what you have in savings and what you owe to come up with a picture of where you would end up after the bankruptcy.
You do have another option: Sell your home and fund the shortage from savings. For example, if you sell the home for $60,000 less than you owe to the bank, but you can scrape together $60,000 from your savings, retirement accounts (you may have to pay taxes and a penalty on that cash), family or friends, you can close on the property and move on.
For many people, coming up with that kind of money to sell a home is prohibitive, but for others it gives them the option to move on without affecting their credit.
It may be too late, given the other commitments you've made, sooner rather than later -- but if you could hold off moving back to Florida for another few years, you might find that the real estate market is much better. You might find that you're able to sell your home for what you owe, and then move south without taking a hit on your credit score.
If you feel as though you can't live without whatever is waiting for you in Florida, then move and suffer the financial consequences. But from what you've described, it sounds like you're sticking a dagger through your wallet.
To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.
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Submitted by Billie Gregory on May 16, 2008 - 6:18am.
Dear Moving-to-Florida,
Read the above advice (which is the "Politically Correct", "NAR-approved" version). Then take a deep breath and know that in my opinion you have LOOOOOTS of other options.
First, educate yourself. Learn what your options are and what you may / will have to do to exercise them. While doing this, doggedly stay focused on what is best for you and your family – not what is best for other parties (i.e. banks, credit card companies, Realtors, Real Estate Investors, Bankruptcy Attorneys, etc.).
Next, speak to a reputable credit rehab counselor BEFORE taking any action(s) to learn what each of your contemplated actions might do to your credit, and how you can recover from each. Many people are able to obtain loans within weeks / months of coming out of bankruptcy. You should be able to find a good one for $300-400 / per person. More than that and you are getting … taken advantage of.
Finally, realize that to accomplish your goal you will probably need to do things that may be high risk, are not socially acceptable, and/or are arguably immoral.
Here is a short list of some of your other options:
1) Consider selling your home using "Owner Financing". In todays credit market you will have dozens / hundreds of people wanting to buy your home who cannot obtain financing from a bank. Depending on the laws in your state you can accomplish this sale using a "contract for deed", a "wrap note," or something similar. Check with your local real estate investment club (Google “REI”, “Real Estate Investment Club”, “Your Local Town’s Name” to find some).
2) Contact your lender(s) and offer to pay a reduced house payment equal to what your home will lease for. This means you will be at cash flow-neutral until the Real Estate market in your area improves enough for you to sell your house for an amount closer to payoff. NOTE: you have very little leverage with the lenders until you miss a payment or two, which will negatively impact your credit scores. Also, you will have MUCH more leverage with the second lender.
3) Offer to give your house back to the lender(s) using what is called "deed-in-lieu-foreclosure" or sometimes it’s called “cash-for-keys”. Essentially, you agree to give your house back to the lender(s) in good shape, in exchange for them not foreclosing on you. This WILL hurt your credit score, but NOTHING like a bankruptcy or foreclosure would.
4) Sell your house using a short-sale. See above. My advice to you is to forget about paying the $60,000 difference. Your credit score is worth something, but probably not $60,000.
Whatever you do, keep a couple of things in mind.
1) You can / will recover. People all across America are in similar situations to yours and have / do recover from them daily.
2) Get good advice. Banks are NOT going to tell you want is best for you. Realtors might or might not either (they might not know what options are available to you). Most Real Estate Investors DO NOT have your best interests at heart either. Same for attorneys. Hire someone who knows what your options are and who is NOT going to make anything from your misfortune. (Usually costs less than $1,000).
3) Know the risks! Many of the actions I mentioned above have moderate to high risks. Know what they are and what you can do to lessen / eliminate them BEFORE you take action.
4) MOST IMPORTANTLY - save up AS MUCH CASH AS YOU CAN BEEEEFOOOOOOOOOOORE you embark on this journey. Everything will cost more until you get your credit score back up again. You are going to need the extra cash to compensate.
Good Luck and let me know if I can help you further.
Submitted by Marcus Burke on May 16, 2008 - 6:58am.
I agree with the above. That's the real deal. Much as I love to read Ilyce's stuff, that was a way dramatic interpretation of your situation. Let me as you a question. Is a lower credit score for a few years worth over $60k in savings? Let me put it this way: If I said I would give you $60k if you would agree to have your score lowered for a couple of years would you take the cash? Hell yes. There is life after bankruptcy - and don't let anyone tell you otherwise. You'll probably get credit card offers as you leave the court room! Most of the richest folk in the world have been bankrupt. Ask Donald Trump.
Marcus Burke
Broker
CondoMetropolis.com
Submitted by Sean OToole on May 16, 2008 - 8:28am.
While this post likely reflects conventional wisdom, it, like the advice from Hope Now seems more designed to make sure the lenders come out ahead than the homeowner.
I shudder every time I see people given advice to tap their retirement accounts, sell their car, cash in the kids college fund, etc. to try and save one bad purchase decision. And for all those who want to blame the homeowner for these decisions let's not forget Lereah's book at the time, or Greenspan's telling them ARMs are ok and that there is no bubble.
The core problem was that people bought these houses based on payment, not price. Through Wall Streets financial engineering of payments they pushed up how much home one could buy for a given payment by as much as 35% versus what a homeowner can qualify for before, or now. The last couple of years of insane appreciation was due to this financial engineering and not real estate fundamentals and it continues to be painful to unwind.
As real estate professionals it is time we start looking out for the homeowner. As a group we should be DEMANDING that lenders start working with homeowners rather than BLAMING the homeowners. And we should do everything we can to steer homeowners away from questionable loan products in the future. Let's remember who are clients are.
Many states do not allow the lender to come after the homeowner for losses from foreclosure (a deficiency judgement). In those states, bankruptcy is a horrible solution to this issue unless the borrower also has other debts like unpaid medical bills (rarely the case in today's foreclosure - primary reason for foreclosure is simply negative equity, see the Boston Fed study).
Marcus - note that The Donald has never declared bankruptcy, a fact that almost got The View sued.
Sean O'Toole
Founder / CEO
ForeclosureRadar.com
ForeclosureTruth.com
Submitted by Wenceslao Fernandez Jr on May 17, 2008 - 4:46pm.
This is most certainly a complex situation in what could be, the next most important financial decision you make, after having purchased your house.
All AND none of the solutions above are right for everyone or for someone's specific situation. But, those posted above are most certainly among the solutions available for the vast majority, including you.
As someone who was once in your situation, I can tell you first hand, it is not a pretty sight. Unfortunately for me, at the time I went through this ordeal, neither the banks were inclined to hear my pleads nor was the federal government suggesting or advising them to help borrowers (me).
Today, things are much different and typically, you can get a lot more help than you think.
However, the most important factor all parties to the transaction will consider, specially the bank, will be your story.
For a short sale or perhaps even bankruptcy to work, you must show a hardship. Bankruptcy has long term effects, but may be mitigated much, much easier than foreclosure.
However, the type of bankruptcy typically necessary for someone in your situation is a Chapter 13, reorganization. Consult an attorney for the best strategy and to see if you qualify (with the recent bankruptcy law changes, you must qualify to be able to file). Also, this does not mean making payment so, consult your attorney.
Regarding hardships, these could be due to any number of factors that affect you ability to continue making payment.
Voluntarily taking a lower paying job out of state may not be considered a hardship. Getting transfered due to a plant or headquarter closure or transfer is.
Other hardships may be health, death or incapacity of a breadwinner, divorce or any other life altering situation, among others.
The first step is to contact your bank MONDAY MORNING.
Grab your statement or last piece of mail they may have sent you for late payment, and immediately dial the 800 number they provide. Speak to their representatives and tell them your story.
Whatever you choose to do...hire a professional to help you get your home sold. But, again, be carefull. Not all doctors, lawyers or CPA/accountants are the same. Neither are Real estate Agents.
Professional Real Estate Agents are typically Realtors, belonging to a local board and members of their state and National Association of Realtors. These professionals are subject to a stricter code of ethics than others who merely passed the state exam.
Still, hire your Realtor after you feel comfortable with their techniques and chemistry with you.
In your situation, and since you are a potential Short Sale candidate, I'd suggest you seek a Certified Distressed Property Expert. Though not many, visit www.1CDPE.com and contact them about a possible CDPE Realtor graduate in your area.
Law, Medicine, Accounting and most professions have specialties. Real Estate is no less. Some are commercial Realtors, others residential. Regardless, within each group, commercial Realtors may specialize in an industry (warehouse, restaurant, office, etc) while residential Realtors may also specialize by area, building, property type (single family, condo, Timeshare, Developer sales, etc).
A CDPE is not only a qualified Realtor, but also one prepared to negotiate and properly submit all documentation to the bank, communicate with you, and the buyer and make sure all aspects of the transaction flow smooth.
Though horror stories abound about short sales taking forever, a CDPE could not only substantially cut the process, but tremendously increase the probability that the file will close after the first offer submission, within days or weeks not months.
Most important than anything previously said by anyone on this post (including myself, of course), is to DO SOMETHING.
Not doing anything could not only hurt you, but it is also something, and THAT is NOT what I mean.
Start by contacting the bank, visiting www.1CDPE.com and find and hire a competent Realtor. Between these folks, you will find your answer.
Farewell...and above all...avoid foreclosure!
Wenceslao Fernandez Jr
www.MiamiRealEstateKing.com
Certified Distressed Property Expert
Miami-Dade County, Florida.