Two Ways to Avoid Foreclosures

August 4th, 2008

Some 500,000 broke homeowners may be able to avoid foreclosures with the real estate housing legislation, which can soon become a law and help them refinance into government-backed mortgages that are more affordable. As several borrowers may not be able to qualify, those facing foreclosure should acquaint themselves with two alternatives – transactions related to ‘deed in lieu of foreclosure’ and ‘short sales’. None of the choices can help you from losing your home, but they can be less painful than foreclosure in the legal process of banks involved to repossess a homeowner’s property.

In case of a short sale, the borrower tries to sell the home at a reasonable real estate market value, which is less than the sum owed on the mortgage. The lender generally contends to forgive the remaining part of the debt. In case of the other option, the borrower passes the home to the lender with his permission ‘in lieu of’ waiting for the foreclosure. It is the lender’s duty to sell the house and he forgives the figure by which the mortgage balance surpasses the home’s current value.

According to an associate vice president of the Mortgage Bankers Association, Vicki Vidal, both strategies offer a legal and psychological relief as most people can move from their home without the burden of mortgage debt. Compared to this lenders can demand the differential figure owed to them in foreclosure proceedings. Although many lenders do not go after this debt, but it has happened especially in certain cases in which the borrower destroyed the property while leaving. Deeds in lieu of foreclosure and short sales have another benefit, which is borrowers have to face a briefer waiting period, prior to obtaining another mortgage.

These two options minimize the impact, which a borrower’s credit score receives. The spokesperson for Fair Isaac Corp, Mr. Craig Watts said that all the proceedings related to foreclosure, short sale and deed in lieu of foreclosure have a more or less similar negative impact on a person’s credit score. According to him, there has not been much analysis to distinguish the credit risk associated with people who finished a short sale and those who were involved in a foreclosure. As a result, “the model ends up treating them all the same.”

For both deeds in lieu of foreclosure and short sales, borrowers need to produce a ‘hardship letter’ to the lender, providing a detail of the reasons for which they were not able to make the mortgage payments. In the real estate market, lenders prefer short sales to the other options.