A foreclosure is the legal process in which the lender attempts to recover the balance of a loan by forcing the sale of the property used as collateral for the loan. Foreclosure occurs when the homeowner is unable to make mortgage payments to the lender. A homeowner has a few options to avoid foreclosure. The most common are mortgage modifications and short sales.
What is Mortgage Modification?
A mortgage modification is used to change the terms of the loan agreement between the lender and the homeowner. A mortgage modification can be used to lower the monthly mortgage payments and help avoid foreclosure. A mortgage modification will allow a homeowner to avoid foreclosure if approved. If a homeowner is already overdue, and foreclosure is imminent, the lender may agree to add the overdue mortgage payments to the outstanding loan principal. Allowing the homeowner to repay the overdue payments at the end of the loan in a balloon payment or slowly overtime.
The Home Affordable Modification Program (HAMP) is a federal modification program that assists homeowners in mortgage modification to avoid foreclosure. The program has two tiers. Tier 1’s goal is to lower the monthly mortgage payments of homeowners in danger of foreclosure. Tier 2 is available for those who do not fit into Tier 1, mainly renters or homeowners that do not qualify for Tier 1.
While a homeowner is negotiating or consulting with either HAMP or the lender directly foreclosure will not occur. The lender is restricted from dual tracking. Dual tracking is when the lender starts a foreclosure proceeding while a loss mitigation application is being processed. It is important to be in contact with the lender’s foreclosure department, because although a foreclosure cannot be completed while a mortgage modification is being processed, miscommunication may occur between the mortgage modification department and the foreclosure department.
It is possible for the lender to deny a mortgage modification and opt for foreclosure. The next option is a short sale.
Is it a Good Idea to buy a Short Sale House?
A short sale is when a homeowner sells his/her property for less than what is owned to the lender. In a short sale, the lender agrees to accept the proceeds of the sale to pay off a portion of the mortgage balance and release the property from the lien. Like the mortgage modification, a homeowner must first get approval from the lender before a short sale can be completed. While the short sale is pending or the approval process is ongoing the lender cannot begin a foreclosure proceeding.
The short sale is considered loss mitigation and therefore a homeowner will need to fill a loss mitigation application with the lender. Most lenders will require a homeowner to present a purchase offer from a potential buyer before the short sale will be approved. If there is a second mortgage, both mortgage holders must agree to the short sale before approval can be given.
Following the acceptance and process of the short sale a homeowner may face a deficiency judgment. Some states do not allow deficient judgment; in Florida a lender is allowed to seek a deficiency judgment against the homeowner. A deficiency judgment is the balance remaining on the mortgage after the proceeds of the short sale are recovered. For example, if the mortgage is $200,000.00 and a short sale is approved and processed for $150,000.00 the deficiency judgment will be made for the remaining $50,000.00.
If a homeowner wishes to avoid a deficiency judgment it must be stated in the short sale agreement that the lender is waiving its option. The waiver must clearly state that the lender waives its rights to the deficiency. During the loss mitigation application and short sale the homeowner should negotiate with the lender to include this waiver language in the short sale agreement.