When You Can't Make the Payments....

This article adapted from information from the National Association of Realtors.

When you are having difficulty paying the mortgage, taxes, and other obligations, here are your options:

1. Keep the Property. Of course this is the best solution, but sometimes it is not possible. Check out family and other resources and be aware of any special “hardship” options that a particular lender may offer, including the “Making Home Affordable” refinancing and loan modifications programs of the Obama Administration. The various programs change frequently.

2. Rent the Property. Could the property be rented (even at a negative cash flow) and sold later in a better market?

3. Sell the Property and Bring Cash to Escrow. This might not sound appealing, but it can be a good choice for sellers who are in a financial position to pay a deficiency from other liquid assets. This approach avoids the credit damage that even a successful short sale will cause. An alternative in some circumstances is for the seller to agree to convert any deficiency into a personal note, or a note on another property owned by the seller. Consult appropriate legal and tax professionals before considering such a move.

4. Attempt a Workout with the Lender. The borrower must speak with the lender directly about all options before it will consider approving a short sale. Lenders are increasingly interested in helping financially distressed homeowners stay in their homes, and are required to do so if participating in the “Making Home Affordable” programs. In some cases, they have been willing to reduce or roll back interest rates, or reduce the allowable payment, to help sellers avoid short sales and foreclosures. It is not generally advisable for the real estate agent to take the lead in representing property owners in a workout. Workouts are not real estate transactions. They are complex contract modifications, and to date, relatively few homeowners in distress have been able to come to a permanent agreement with their lender. The homeowner is advised to consult with an attorney if this is the option they choose. New laws and emerging policies, and procedures by the Obama Administration, Fannie Mae, Freddie Mac, the VA, the FHA, and private lenders make the workout option more complex, but also present greater opportunities for the financially distressed homeowners.

5. Offer the Lender a “Deed in Lieu of Foreclosure.” If the seller owes more money than the property is worth, is unable to make payments, and is likely to lose the property in foreclosure in the near future, offering to trade the property to the lender in exchange for the cancellation of the note might make sense. This approach is more likely to be successful in states with very long foreclosure timelines. The lender can obtain the property much sooner and may feel that the mitigation of loss is worth the cancellation of the note. Like workouts, this is a contract negotiation, and should be undertaken only after consulting with an attorney.

6. Offer the Lender a “Short Sale.” These are the elements of a successful short sale:

o The property is worth less than is owed.
o The seller has some hardship that makes it impossible or extremely impractical for the seller to keep the property
o The seller is cooperative and willing to work with a real estate broker to package the short sale.
o The lender is contacted and expresses willingness to entertain a short sale.
o The property is listed, with appropriate caveats and protections for the seller, properly priced, and effectively marketed.
o The lender is presented with an offer, accepted by the seller, along with a completed short sale package and narrative explaining why the short sale is necessary and desirable.
o The lender approves the offer and escrow closes as usual. No proceeds go to the seller.
IMPORTANT: On occasion, lenders have “approved” short sales that included personal notes for the deficiency, and unwitting sellers have signed the notes without a full understanding of the consequences. Attorney representation for the seller is crucial.

7. Allow the Property to go to Foreclosure. Usually this is the worst option. It does the most damage to a property owner’s credit. There are circumstances, however, in which it might make sense for a property owner who has no other resources with which to obtain housing to simply stay in the property as long as possible.

We'll go through these options with you in detail. Remember, you are not alone, this is a nationwide situation. Latest figures show 22% of homeowners in Illinois "under water" on their mortgage. :-(