Avoid Foreclosure

Do you currently own a home that is worth less than what you owe on your mortgage? Are you considering walking away from the property and foreclosing? Wait and review the information below, you may have other options.

Close to 50% of all sales in the Central Florida market are currently distressed or bank owned properties. This phenomenon continues to drive down prices in all neighborhoods. Florida also boasts the second highest foreclosure rate in the US with one in every 135 homes targeted for foreclosure.

You DO have options beyond foreclosure. Lenders and investors who own the underlying mortgages DO NOT want to foreclose and reposes the property. They have loss mitigation departments set up specifically to handle properties in pre-foreclosure. The main objective of these departments is to find ways to resolve properties in default and come to a solution that avoids them having to foreclose. The banks options include short sales, deed in lieu, loan modifications and forbearance agreements.

One way to avoid foreclosure is through a "short sale". A short sale takes place when a property is sold for less than what is owed on the mortgage and the lenders who own the underlying mortgage or mortgage's, accept less than the full payoff as a settlement. This allows the property to transfer to the buyer even though the lenders did not receive the full amount due.

Most often short sales are bought and sold after the foreclosure process has started but before the process is completed through a sheriff's or trustee's auction sale. This is called the pre-foreclosure stage.

Below you will find a few FAQ's and you can always contact us with further questions regarding your specific property or properties.

What happens to the difference in what is owed and what the bank accepts?

When the lender accepts a short sale on the property for less than what is owed, then a deficiency exists with the loan. The deficiency is the difference between what the homeowner owed and the amount the property was sold for. There is a deficiency for which the lender can then sue the homeowner. The key phrase is "can sue." That is the right of the lender. However, that is a practice that almost never happens, but it is a real concern for the homeowners - our Short Sale and Foreclosure Department will negotiate with the lender to not seek a deficiency judgment against you.

There is a second issue as it relates to the deficiency which is the 1099. You cannot be issued a 1099 and be sued for a deficiency judgment.

The lender will issue a 1099 to you for the difference. As an example, if you sold your home for $400,000 but owed $500,000 to the lender and they accepted the $100,000 loss - the lender will then issue you a 1099 on the $100,000. This will have to be reported as income and you will have to pay taxes on the $100,000 as though it was earned income.

Will I have to pay taxes on the forgiven debt?

The Mortgage Forgiveness Act of 2007, which was signed into law on 12-20-07 is now effectively getting rid of the question "will I be taxed on the Short Sale". Prior to this action, forgiven mortgage debt due to foreclosure, short sale, or deed in lieu of foreclosure, was potentially taxable income to the borrower. This law, however, temporarily waives these taxes for debts forgiven (as high as 35%) from the beginning of 2007 to the end of 2009.

For a copy of the Mortgage Forgiveness Debt Relief Act of 2007, Click Here

Only Acquisition funding can be forgiven by the Mortgage Forgiveness Debt Relief Act of 2007. Foreclosure, Deed in Lieu and Short Sales are all treated the same in regards to taxes. Any cancellation of debt is a taxable event except for any acquisition funding for your primary residence that you've lived in for at least the last two years. Everything else is taxable. However, please see your tax advisor if you have a second home or investment property that you are considering a short sale on. Your accountant may advise you that you may have a loss on this investment property that would offset any gain. You can also call us today to speak with our expert accountant and attorney that can assist with  tax issues relating to a potential short sale of your investment property or second home.

The bank may also ask for a promissory note on all or a portion of the debt forgiven. There are many variables that the lender considers when requesting a promissory note and we will work closely with you and the lender to try to avoid this.

It is very important that you are proactive and deal with the short sale before it becomes a foreclosure. At least there is a chance that we can negotiate away the deficiency before it even becomes an issue.

A deed in lieu of foreclosure is another option to avoid foreclosure in which the borrower conveys all interest in a property to the lender to satisfy a loan that is in default and avoid foreclosure proceedings.

The deed in lieu of foreclosure offers several benefits to the borrower and the lender. The main advantage to the borrower is that it immediately releases them from most or all of the personal indebtedness associated with the defaulted loan and it hurts their credit less than a foreclosure would. The lender gets to avoid the hassles of foreclosing on the property and subsequently having to resell it.

In order to be considered a deed in lieu of foreclosure, the indebtedness must be secured by the real estate being transferred. Both sides must enter into the transaction willingly and in good faith. The settlement agreement must have total consideration that is at least equal to the fair market value of the property being conveyed. Sometimes, the lender will not proceed with a deed in lieu of foreclosure if the outstanding indebtedness of the borrower exceeds the current fair market value of the property. Other times, lenders will agree since they will end up with the property anyway and the foreclosure process is costly to the lender.

Neither the borrower nor the lender is obliged to proceed with the deed in lieu of foreclosure until a final agreement is reached.

Another option is a loan modification. Mortgage Loan Modification is a process where a current loan is restructured to be more affordable to the borrower, lowering monthly payments and helping to avoid foreclosure.   In many cases where the home is worth less than the loan amount, the balance is reduced to an amount closer to the appraised value of the house and the payments are reset at a more affordable rate.

A final option is a forbearance agreement which is typically an agreement to postpone, reduce, or suspend payments due on a loan for a specific time period. Interest that accrues during the forbearance remains the debtor's liability. When the forbearance expires the unpaid interest is added to the principal balance of the loan.

Typically, the lender agrees not to foreclose on the property or accelerate payments due on the loan during the forbearance period. In exchange, the debtor agrees not to contest any actions taken by the creditor to collect the debt in the event that the debtor fails to make scheduled payments or live up to other terms of the forbearance agreement. In some forbearance agreements, the debtor may grant the creditor a deed in lieu of foreclosure if the terms of the forbearance agreement are not met.

Based on your individual circumstances our Short Sale and Foreclosure Department can assist on finding which one of the above options would be the best for you. We will ensure that this very difficult process is a smooth and easy one, keeping you informed every step of the way.