Short Sale or Foreclosure – What do you think?

Hi Lesslie,

I bought my house in late 2006 and paid $750,000 for it at that time. The value now is probably about $500,000. I had a first and a second on it and I would really like to do a loan modification but am not sure I will qualify. Recently I became a part time employee instead of full time and I can no longer afford the payments. I am already 60 days late. If I had a lower payment, I think I could stay in the house. Should I just walk away from the house or do I have other options. Thank you, Stephen.

Dear Stephen,
There are so many factors that can have an effect on what you can and will be able to do.
It sounds as though you have already exhausted the loan modification option because you are only working part time. If you had the income to make the payments with a loan modification, this would be a good option—although not that many people actually get the mods. A problem sometimes is that you have already missed payments, so you will have those payments added on to the loan and sometimes banks will state that you must be current in order to get the loan modification.

If that is not an option, you have the possibility of a short sale, or walking away from the property. A short sale is when a home owner is “upside down” in his property and that the loan amount (s) is more than the value of the house. In this case, you can list the property with a Realtor as a short sale, and when there is an offer on the property, your Realtor or a short sale service will negotiate with the lender to see if the lender agrees to take a lesser amount. IT IS VERY IMPORTANT that if this is the case, that you have something in writing that the lender will not come after you later for the difference between what the loan amount was and what the lender receives. You want to make sure that there is NO RECOURSE. In addition, a short sale will have an effect on your credit score—it could be as little as 30 points and as much as 120 and maybe more.

If you refinanced your property for “cash out” and used the money for purposes other than the house, it could be that there would be RECOURSE, and this may not be a good option for you. There are certain times when it might be advisable for someone to have a foreclosure instead of a short sale and it is very important to talk to your tax accountant and seek legal advice to make sure you are making the right decision.

At Seven Gables we have a group of people trained to help homeowners who are in trouble to look at their options, timelines and strategies. There is no cost or obligation for this evaluation and feel free to call me if you think I can help.

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