Viki Benbow - The Real Estate Huntress: Foreclosure - It may not end there!

The number one course that most homeowners who are in trouble are taking is foreclosure. Up until recently it was considered not much different than a short sale in how it would affect your future credit worthiness. However, that is now changing.

Lenders have recently issued a change in the direct underwriting guidelines making a negotiated short sale far less damaging than foreclosure. They are also rating foreclosure by whether or not it is due to mismanagement of funds or if the borrower has documented extenuating circumstances. Not only will it take longer to get a home loan approval if you have a foreclosure, but it will also require a substantially larger down payment.

There are other dirty little secrets that most homeowners are not aware of when they just give up and walk away are:

1) Many times they really are candidates for Bankruptcy due to the total debt they are carrying. If they allow the foreclosure without getting sound advice from a legal expert, they may limit or eliminate their ability to file for the much needed debt relief that bankruptcy was designed for and offers to help them get a truly clean start.
2) The homeowner or property owner also needs to have good legal and accounting advice to determine how their debt forgiveness which is determined by how large a loss the bank takes will play into the taxes they may owe as a result of the foreclosure. If the loan they have is a purchase money loan (the loan used to purchase the home), then the new law that was recently passed may exempt that tax penalty. However, if the property owner refinanced the property, then the debt forgiveness is likely to be taxed unless the property owner can prove insolvency. You really need to have a good tax accountant look at your situation before you start down that path. It might be far cheaper to bite the bullet and continue to make those payments if the property owner has other assets.
3) If your loans are in the form of a first and a second and they are not considered purchase money, when the foreclosure takes place what normally happens is that the holder of the first mortgage forecloses wiping out the second lien holder. That second lien holder doesn't just go away under most circumstance. They actually have 4 years from the last payment to file a new judgment against the borrower. We are finding that several things are taking place in real life with regards to these loans. The lien holder is not filing right away. The theory is that if they do, the property owner may then file bankruptcy which would eliminate that judgment. They are instead waiting about 3 years watching the borrower's credit and debt situation and when that borrower has worked their debt level down they file the judgment. It makes for a very unpleasant surprise. And, if that is not bad enough, in many cases, those loans are actually sold to collection companies for a significant discount and the debt collectors are pretty ruthless.

So what is the answer? Get good legal and accounting advice the minute you know you are heading towards trouble. I have said many times there is no easy way out of this mess. But if you are going to take a hit, possibly lose your home and damage your future credit, have a plan that is the lesser of all the evils.

As stated in yesterday's Real Estate Minute and the corresponding post, I have teamed with a mitigation specialist. Together we will work to help you talk to the right experts, negotiate with your lender and find the best solution possible for your set of circumstance.

If you are one of those who are in trouble, make the no obligation call to me right away. Your call will be treated with compasion, dignity and in confidence. The number is (916) 973-4532. Don't risk this very important matter to anyone but a pro! Remember, experience is not expensive, it is priceless!