Ways to Avoid Foreclosure
Homeowners experiencing a financial hardship have options to avoid foreclosure and a short sale is the premier choice.
Existing options include the following:
- Loan Modification
- Approved change in terms of an existing mortgage agreement with intent to lower the month mortgage payment but not the loan balance for the borrower.
- Repayment Plan
- Otherwise known as a forbearance agreement – a repayment plan is a catch up plan purposed by the lender in which the borrower must come up with an upfront lump sum and commit to higher monthly payments.
- Deed in Lieu of Foreclosure
- Similar in long term negative effects of a foreclosure a Deed in Lieu of Foreclosure accelerates the foreclosure process by having the borrower sign over the property to the lender.
- Short Sale
- Enables the home owner to extinguish the existing mortgage debt through the process of selling short the negative asset. Gives borrowers experiencing a financial hardship a fresh start.
The Laws and Government Programs that protect home owners from lenders pushing to foreclose:
- Mortgage Relief Act of 2007
- The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
- California Senate Bill 401
- Senate Bill 401 generally aligns California’s tax treatment of mortgage debt relief revenue with federal legislation. Pertaining to debt forgiven on a loan secured by a “qualified principal residence,” individuals will now be exempt from both federal and state income tax penalties. The current federal exemption is for indebtedness up to $2 million, whereas the California State Senate Bill 401 exemption is for indebtedness up to $800,000 and forgiven debt up to $500,000.
- California Senate Bill 458
- As of July 11, 2011 if you are a home seller in California, the new law SB 458 protects you from deficiency from not only a purchase money loan or original mortgage, but also protects the seller from second loans, HELOC, and junior lien holders. What this means is if you are a seller and you get your Short Sale approved, the junior lien holders or second loans have no recourse with regard to debt once they approve the sale and you close Escrow.
- California Senate Bill 931
- No Short Sale Deficiencies- Starting January 1, 2011, a seller's first trust deed lender cannot obtain a deficiency judgment against the seller after a short sale. Providing written consent to a short sale shall obligate the first trust deed lender to accept the sales proceeds as full payment and discharge of the remaining amount owed on the loan. This law applies to first trust deeds secured by one-to-four residential units, but does not limit the lender from seeking damages for fraud or waste by the borrower.
- Home Affordable Foreclosure Alternatives / HAFA
- President Obama passed some incredible measures to insure existing home owners had the ability to get a fresh start and avoid a foreclosure. The highlights of the HAFA Program include allowing the borrower to receive pre-approved short sale terms prior to the property listing. It releases the successful HAFA borrower from future liability for the debt. It incorporates a standard processes, documents, and timeframes. And lastly but certainly not least it provides financial incentives to borrowers, servicers and subordinate lienholders. If approved for a HAFA Short sale the home owner can receive up to $3000 for relocation assistance.
- American Taxpayer Relief Act
- The original law applied to indebtedness discharged before January 1, 2010. That end date was extended by 3 years from 2010 to 2013 per H.R. 1424, the Emergency Economic Stabilization Act of 2008. The new law extends the date one year further to any indebtedness discharged prior to January 1, 2014.