Having been a real estate agent through the last financial crisis, I sincerely hope we are not headed that way again. It was very sad. Most local experts feel that the Austin metro market is in somewhat of a bubble thanks to our strong tech sector job market. However, not all will be spared from the fallout of COVID related business closures and company downsizing unfortunately.
If you find yourself in a challenging financial situation and you currently own a home, please do not delay starting the process to learn your options. Even one month of missed payments can limit your future options for avoiding foreclosure.
The first step is to contact your loan servicer and see what options they offer. Don’t just stop making payments! Also, seek the guidance of a local real estate professional for market guidance and an attorney and CPA to discuss your legal options and the financial impact.
There are various options to you, should you become unable to pay your mortgage. None of them are great unfortunately, so you will have to decide which one would be less painful for your situation. The more equity you have in your home and the better your credit, the better off you may fare.
Forbearance – Although this seemed like a great option when it was touted as part of the initial COVID relief plan, CARES Act, many people are finding out the hard way that it wasn’t all it was cracked up to be. Unfortunately instead of saving people, it could be that they end up losing their home anyway. This protection began on March 18, 2020, and extends through at least August 31, 2020, with possible extensions. Under the CARES Act, the protections are for homeowners with federally or GSE-backed (Fannie Mae or Freddie Mac) funded mortgages. Other loan types may have offered forbearance options, but it may not have been part of the CARES Act. The problem we will be seeing soon is what happens at the end of these forbearance periods. Some people may be surprised by substantially higher payments (with the delayed payments being spread over future payments) or some may find themselves owing months of delayed payments all at once. Depending on the owners equity position, they may or may not be able to get out from under the forbearance burden. Before you go the route of a forbearance, make sure you understand the long term consequences. If you took a forbearance and find yourself unable to catch up, you may be left with some of the options below. Unfortunately the forbearance in itself weakens your credit standing and makes it harder to pursue a refinance, home equity or personal line of credit. Download my Guide to Avoiding Foreclosure below.
Short Sale – If you owe more on your property than what you will net from selling it, you would be in a short sale situation. A short sale is when you owe more to the bank than what the house is worth (including selling costs). A short sale is a process. You can still live in the home during the sale process, which will help buy you some time if needed. In order to sell your home short, you will have to ask the lender to settle for less than owed when your property is sold. You need to make this arrangement with the lender before you list your property for sale. During the last financial crisis, I helped many clients navigate this process with their banks. This is a complex process that can take time. Only an experienced agent should help you through this process. Banks are also much more experienced with this thanks to 2008-09 and they are better prepared to handle it, so hopefully the process this time around will be more streamlined. Before you stop making payments, see if this may be an option for you. Even though you will have to sell your home, your credit will not be impacted as harshly as a foreclosure. However, keep in mind you may still be on the hook to pay taxes on the forgiven debt. Read More Here.
Deed in Lieu of Foreclosure – This is not very common, but it may be an option. Maybe you just want to “walk away” and avoid foreclosure. You know you won’t be getting anything out of the property and you need to cut ties before your credit gets destroyed or whatever your situation may be. With a Deed in Lieu, you are asking the lien holder to relinquish you of your obligation to pay the loan. It’s highly unlikely a lien holder will do this, unless it’s immediately beneficial to them in some way, i.e. there is a lot of equity or potential for a quick sale and return. If there is any equity in the property, a Deed in Lieu will require you to forfeit that equity and just walk away. There may be tax and financial implications, so it’s best to consult an attorney and a CPA if you want to try to go this route.
A better option would probably be with one of the many “buy your home for cash” companies. If you are OK with selling for less than market value and you just want to sell fast, then it might be a better option to look into a fast cash broker. You will have to weigh the pros and cons. Keep in mind, there are a lot of fees involved with some of the cash offer companies. Read my post about discount brokers here.
Foreclosure – If you stop making your mortgage payments, you will be in default of your loan terms. Read More Here. This will lead you down the path of foreclosure. When a Notice of Default is filed, it becomes public record. You will start receiving all kinds of offer to help. Be very careful. There are a lot of people and companies out there waiting for the opportunity to take advantage someone in a fragile situation. Please fill out the following form to receive and download my Guide to Avoiding Foreclosure.
If your home in Texas sells at a foreclosure sale for less than you owe on your mortgage loan, you might be on the hook to pay more money. That’s because, in most cases, Texas law allows the foreclosing bank to get a deficiency judgment for the difference between the sale price and the borrower’s total debt. In a short sale, you may get a 1099 for the amount forgiven and will have to pay income tax. Be sure to consult with a CPA to understand the full financial implications.
Pre-Foreclosure – After a homeowner is substantially behind on payments, the bank files a first Notice of Default with the courts to start the proceedings for foreclosure. This is public record. As mentioned above, sellers watch out for those who will come out of the woodworks offering assistance or looking for a deal.
If you are a homebuyer waiting for a “foreclosure deal” be leery of property listed as “pre-foreclosure” or some other terminology like distressed property. The home may not be for sale – yet or ever. The owner may be working things out with the bank or trying to figure out how to save their home. Also, there are scammers out there who will try to “flip” the house by buying out the seller and reselling to another buyer, which may be illegal and likely will leave someone getting scammed. There are also many websites and databases that broadcast Notice of Default filings that are advertised as “pre-foreclosures’ to get buyer leads – Zillow is a prime example. Real estate agents also use these lists to call for listing leads. I personally do not cold call from purchased lists.
REO – An REO (Real Estate Owned) is a bank owned property. Meaning that it has already been foreclosed and is now owned by the bank and is for sale. It has gone through all the court proceedings and is now a bank asset. The process can take months. You may see a vacant home in your neighborhood for many months that was foreclosed or in the process of foreclosure.
Refinance – If you have equity in your home and you have managed to continue making payments and maintain a good credit rating, this would be the best option for avoiding the pitfalls of getting behind on payments. But you need to act fast – before you are late on payments or your credit gets tarnished. If you foresee some challenging times in your future, reach out to an experienced lender now to see what your options are for staying in your home and using your equity to float you through. Whether it’s a cash out refinance or a home equity line, it may offer you a short term solution. Here is a list of my Local Preferred Lenders. Local and honest.
Sell and Cash Out – If you have enough equity in your home to cover the cost of selling, then cashing out might be your best option if you find yourself in a situation where you won’t be able to afford your home long term. If this is a route you think you will need to take, it’s best to do it before you get behind on payments or find yourself in more stressful situations. Selling a home in “normal” circumstances can be stressful anyway, but then add on top of that needing to sell ASAP or managing financial or even health burdens – it will not be fun. And it may likely put you in a position of vulnerability. Unfortunately there are many individuals and companies looking for these “opportunities”. Be skeptical of offers to buy your home for cash. There are many pitfalls there. But it’s not to say that it couldn’t be an option for you – just understand that their offer will be below market value and will have a lot of fees (that are higher than a standard listing fee). Read my post about discount brokers here.
Plan Ahead. Be Proactive. Consult experts.
As frustrating as it all may be, please just take the time to consult with a local, professional REALTOR who can help you weigh your options. Download my Guide to Avoiding Foreclosure using the sign up form above. Each situation is different so there is no one size fits all approach. I have helped many people navigate the process, so please contact me for a private and confidential consultation. Christina Legrand, REALTOR with RE/MAX 1 in Cedar Park, TX. 512-966-6540