November 2007

If you own a home in Orange County, Ca and you find yourself unable to keep up with your mortgage payments, you may find yourself in Foreclosure in the near future.  The basic question you need to ask yourself is, “Do I try to keep my home, do I sell it, or do I declare Bankruptcy ?”. 

If your monthly house payment (including property taxes and insurance) does not exceed 40% of your gross monthly income, it should be possible for you to keep the property.  If the payment is greater than 40% of gross monthly income, consider selling it or transferring the property to avoid negative impacts to your credit. 

Plan A -  Keeping the Property:  If you have a significant amount of equity left in your home (greater then 20%), and the cause of your delinquent payments was due to a temporary setback which you have, or can soon overcome (ie: Medical Emergency), then your first option may be to refinance your home and include the back payments (referred to as Arrears) in the new loan balance. If that does not apply to you, then you can try to negotiate a work out with your existing mortgage lender(s).  Lenders want the loan to be current – they don’t want to have to complete a foreclosure and own a vacant home. See if it is possible to make up the defaulted amount over a period of months.. or renegotiate the loan interest rate … or re-write the note and include the defaulted amount.  If none of these options are possible or did not work, then it is time to consider Option 2. A side note – make sure you talk with a Short Sale expert even if you think you have some equity in your home, for property values have dropped substantially in the past 12 months, and many homeowners are not aware of the true value of their property.

Plan B – Selling the Property:   If you have some equity left in your home (ie: 5% or more), then your best bet is to sell your home outright on the open market using a professional real estate broker.  If your equity is less then 5%, but greater then 0%, and the Arrears are a few Thousand or less, and your monthly payments are too much greater then the market rent for your home, you may want to consider a Lease with an Option to Sell.  You will most likely need a professional Realtor to handle this type of transaction as well for they are more complicated then a standard sale. If none of the above options work out, or if you have no equity left in your home, then your only option at this point may be a Short Sale.

A Short Sale is a situation in which the mortgage debts are more then the home is worth.  In this situation, the Mortgage Lenders need to be convinced to reduce your mortgage debts down to level equal to the net selling price of the home.  You will most certainly need real estate professional who are experienced in these types of transactions, for as you can imagine, trying to talk the mortgage lender(s) into writing off, let’s say $40,000 in debt, is no easy chore. 

Plan C – Foreclosure and/or Bankruptcy:  Bankruptcy is a major step that will have long lasting negative impact on your credit rating. Also, when you file bankruptcy, your financial matters fall under the jurisdiction of the courts which could limit your options. For these reasons, we do not recommend filing Bankruptcy as simply a means to try to keep your home.  I’ve never seen that work, for the mortgage banker(s) can pierce the Bankruptcy so to speak, and still foreclose on the home for they have priority to any equity that may exist in the property. If you have other financial issues that may require a Bankruptcy that is a different story, so please seek appropriate legal advice.  

We also would never recommend letting your home go through to the end of the Foreclosure Sale.  A Short Sale can stop a Foreclosure and is a much better solution.  A Foreclosure will stay on your credit report for 7 years, plus many mortgage experts claim that a Foreclosure will damage your FICO score much worse then a Short Sale, in the range of 100 to 200 points lower.  A Foreclosure will usually be filed by the mortgage lenders after your loan payments have fallen 3 or 4 months behind.  The Foreclosure filing consists of a 3 month Notice of Default period, then a 3 week Notice of Trustee Sale period and then the house is sold at Auction to the highest bidder, if any.  If the Notice of Default has been, or is soon to be filed, you have sufficient time to explore your options, but time is of the essence.  There are some potential income Tax consequences of either a Foreclosure or a Short Sale, so consult with an expert in this regard.

Please don’t make any hard decisions regarding Foreclosure, Bankruptcy, Short Sales or other options, based solely upon reading this article though.  Please seek appropriate legal and financial council first. If you would like to discuss your options regarding selling, leasing or conducting a Short Sale of your property here in Orange County, please feel free to call us anytime at:  949-388-3396 or drop us an email at:  Info@OCShortSaleTeam.com , or visit our website at:  www.OCShortSaleTeam.com