Q: Do I short sale my house, let it foreclose, modify the loan, file bankruptcy or pursue a deed in lieu of foreclosure?

A: A short sale is always the best of your difficult options. I would always speak with an attorney or accountant but the short sale allows the seller to continue to control the scenario. Once the seller misses two payments, the lender will send them a hardship package which typically consists of a request for a hardship letter, last two pay stubs, last two tax returns, last two checking account statements and a financial worksheet. The lender often uses this information for loan modifications or short sale approval. If your home is your primary residence, you are more likely to have the short sale approved. If you have a 1st mortgage and a home equity loan/2nd mortgage, it is common for the first mortgage to reduce the loan amount to help you close the loan. The HELOC or 2nd mortgage settle for pennies on the dollar and many large institutions will only give the second lien holder $3-5K at most. These lenders in the 2nd position know this so they are cooperative to receive something versus nothing. If not, please remind them that they will likely procure nothing if the home goes into foreclosure. The banks won’t short sale your mortgage unless you’re behind in payments. Most foreclosures can be stopped as late as three weeks before the hearing.

Keep in mind, when the lender receives a signed offer and the hardship package, it takes time. They order a Broker’s Price Opinion (BPO) and an appraisal. These evaluations must support a similar value that any Offer represents. It typically costs banks $30K in foreclosing fees between their attorney fees, property rehabilitation costs and Realtor fees. They really don’t want the house on their books but an inexperienced Realtor will cost time and money while learning this process. In this economy I have seen more lenders accept the mortgage amount with scenarios such as total debt forgiveness, an IRS Form 1099 for the difference/shortage, a zero percent repayment program with a 15-year term or a deficiency judgment.

I’ve seen credit scores drop 200 points or as little as 50. Most of the credit impact is from late payments.

Richard Tomasini, Sales Manager of Park Ave SFR, Broker and former Appraiser 704-307-9793 rich@parkavenuenc.com