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Walk Away from Foreclosure? Pros & Cons

05.07.2009 · Posted in Real Estate Articles

Once a pending foreclosure becomes a matter of public record, distressed homeowners are flooded with letters and phone calls from attorneys, short sale negotiators and mortgage mitigators, all claiming to have the power to “save their home” or offer the best possible solution. Some are good companies with good intentions. But, beware; many are unscrupulous predators out to take advantage and make things much worse. They also charge extraordinary fees ranging from $2500 to as much as $5000. A reasonable fee should not exceed $2000 in most cases.rnBefore deciding to walk away, distressed homeowners should examine their other options. The first option to examine is whether a refinancing of the mortgage is possible. Unfortunately, many people owe more than their home is worth and therefore can’t qualify. Lending guidelines are also much tighter now in 2009 than they were just a year ago due to the credit crisis.rnThe second option I recommend is to see if a Loan Modification is possible. This actually can have better results and cost less than refinancing…but there are some conditions. The first is that there must be a documented hardship. The next consideration is whether there is adequate income to support the modified payment. Each lender has their own guidelines, but these are the 2 main ones. The modification can often lower the interest rate by 3% or even more which is why I said it can actually be better than a refinance. Also, there are usually no lender costs to do a modification. On the other hand, a refinance can often have closing costs of $3000 or even more!rnIf the borrower cannot qualify to refinance or modify their loan, then selling the property would be the next option to examine. If there is equity, you should not be walking away. Sell the home and keep that equity…you will need it. Many people, however, are “upside-down” or “underwater” which are terms that mean the property is not worth what is owed on it. If the amount is relatively small, you can write a check for the difference. It would be better than having a foreclosure on your record, even if you have to borrow the money to do it.rnIf you owe more than the property is worth and you don’t have the money to pay the difference, then a short-sale may be best. A short sale simply means that the lender(s) agree to accept less than what is owed. They release their lien and the sale can be completed. This sounds easy, but it isn’t. Most short-sale attempts never close. The process normally takes an average of 3-4 months to complete. In many cases the Buyer backs out because they get tired of waiting and find an even better deal. An important consideration is whether the lender will agee to forgive the deficiency. Most mortgages allow the lender to pursue the borrower for any loss incurred. This typically includes all of the foreclosure costs. Examples are: attorney fees, court costs, taxes, insurance, maintenance costs, Realtor commissions, and closing costs. This can add up to $20000 or more! A professional Foreclosure Assistance Company can often negotiate with the lender so that the deficiency is forgiven.rnAn important consideration that many people are unaware of concerns Income Tax liability. Any amount “forgiven” by a lender is normally treated as income by the IRS. The borrower will be required to pay tax on the forgiven amount at the taxpayer’s highest tax rate. For example: If the amount “forgiven” is $100,000 and the borrower is in a 25% tax bracket, they will owe $25,000 in additional income tax!rnBut…there is some good news that you need to know. The IRS has temporarily suspended this tax liability for “forgiven” debt through the end of 2009. It may or may not be extended for 2010…stay tuned.rnIf none of the above options is workable, then maybe the best thing to do is just walk away. The decision of what to do is and how to do it is one of the most important decisions a person can make. There are many potential pitfalls that can cost many thousands of dollars for the unexperienced. There is nothing that says you cannot make these decisions alone, but it can be very costly if any mistakes are made. Hiring an expert to advise you and walk you through the process is usually a good investment, as long as you use a reputable company. Think of it this way: Suppose you have an important legal issue with a lot of money at stake. You can elect to represent yourself in court without an attorney if you choose, but it could easily end up costing you far more in the end than if you hired a qualified attorney. Most people agree that O.J. Simpson was guilty, but he won his ****** case because he hired great lawyers. Do you think he would have had the same results if he had chosen to represent himself?rnThis article was written by David Smith (734-756-6050), Author and President of the U-Move-On Company. David provides Expert Loan Modifications and Foreclosure Solutions for distressed homeowners with a unique program that offers the support and encouragement his clients need to cope with foreclosure.

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