By Attorney, Shawn E. Nelson
In these trying economic times, many people are facing the prospect of not being able to pay their mortgage. Whether true for a personal residence or an investment property, this situation leads to stress and puts a strain on even the most stable of households. Unfortunately, there is much misinformation that exists in this area and many complicated laws that can be misunderstood, leaving people without a correct understanding of their options.
There are options available to these people, each with pros and cons. One such option is a loan modification or forbearance. This option may be the preference of some people as they could be able to keep their house with reduced monthly payments, interest and/or principal. More information about modifications may be obtained by contacting the author. But what happens when people have determined that they do not desire to keep their property for whatever reason? All of these options result in the property owner not keeping the property.
First, the bank may agree to take the property back through a deed in lieu of foreclosure. Commonly referred to as a “deed in lieu”, the homeowner gives the bank title to the property in exchange for release of the mortgage. The bank avoids the expense and time of going through the foreclosure process. The homeowner should be released from any further financial obligation on the property.
Second, if the homeowner is able to locate someone to purchase the property for less than the total amount owed, the bank can agree to accept that lesser amount in full payment of the loan. This process is commonly called a short sale. The lender typically prefers this option as they end up with money toward the loan instead of real property (which is currently somewhat difficult to sell). The homeowner is again free of any further obligation on the property.
Third, if the homeowner fails to pay the loan, the lender can take the property back in foreclosure, usually through a trustee’s sale. The bank goes through a process that takes several months, but ends up with title to the property, or sale to another buyer for the sale amount.
Anyone facing foreclosure should speak to experienced legal counsel to understand their legal rights. Each of the above-described options will have drastic effects that can only be determined with an analysis of the homeowner’s current status. There may be tax consequences to certain actions as well as the possibility that the lender will sue for any amounts not recovered, also called a deficiency. Finally, if a bank approves a deed in lieu or short sale, the agreement should be reviewed by counsel to determine if the documents actually release the homeowner from all liability and to determine the full legal effect of the documents.