2008 is going to be a tough year for many homeowners, particularly those in California. While not declining nearly as much there are also some trouble spots in Idaho (Coeur d'Alene area), and Washington (Seattle and Vancouver areas). After 20 years of relatively low interest rates and high home appreciation rates the market has reversed itself making it very difficult for you to supplement your income with equity withdrawals from your home.
A lot has been said in the media about how we came to be stuck in this situation or who is to blame for it. For me this "issue" is much simpler than everything you've heard so far - IF YOU SPEND LESS THAN YOU MAKE AND SAVE THE DIFFERENCE ALL WILL BE GOOD. And I'm talking about spending less than your earned income - taking equity out of your home to pay for credit cards, cars, vacations, etc. does not count. Another way to put this is to ask yourself "is my home loan balance less today than it was 5 years ago"? If you can answer positively then you are on the right track.
Recently I've begun fielding more and more questions about foreclosures, short sales, and bankruptcy from past clients who have no equity left in their home (many are "upside down" - they owe more than the home is worth) and can no longer afford their payments. There is just not enough space here to adequately address these issues. I will provide some brief notes and will continue to write about these issues in the coming months.
NOTE: I am not an attorney and the following information is more opinion formed by my experience than actual facts you can rely upon. If you are considering a foreclosure, short sale, or bankruptcy I urge you to contact an attorney to make sure you understand the process.
Foreclosure - typically a foreclosure starts when you have missed three consecutive mortgage payments on your first OR your second mortgage. You will know a foreclosure has started because your lender will be calling frequently and you will receive a legal notice that the foreclosure proceedings have begun. Thousands of dollars of late fees, penalties, and other fees will be added to your loan balance and approximately 90 days after the foreclosure notice the lender will sell your home. The foreclosure will be reported on your credit report, your score will drop 200-300 points and you will be precluded from obtaining a conventional home mortgage for at least four years.
Short Sale - A short sale occurs when you sell your home for less than you owe and your lender agrees to accept less than the full loan amount. They may or may not create a note for the difference and expect you to repay the shortage. This is a "booming" industry right now and there are plenty of really bad individuals offering to "help" you negotiate a short sale with your lender. If you take this route please make sure you use an experienced Realtor and short sale negotiator! A short sale is also reported to the credit bureaus but is significantly different than the foreclosure. A short sale is not a "public record" item like the foreclosure is and will not cost you as many points as the foreclosure would. Think of it this way - a foreclosure means you blew off the lender and your responsibility to pay them back while a short sale means you did not pay "as agreed" but did make an effort to do so. You are probably going to have to wait 3-4 years to use conventional financing to purchase a home.
Bankruptcy - This is not real estate debt specific relief but may be utilized that way. If you lose your home to foreclosure the lender may have the right to file a deficiency judgment against you for the unpaid balance of your home loan. Some people will file a bankruptcy to avoid paying this deficiency judgment. A bankruptcy is a public record and will be reported by the bureaus as such. However, if you get through a bankruptcy while reaffirming your home loan(s) payment(s) then you may be able to obtain conventional financing within two years of the discharge date.
There are many "plans" being touted in the media right now to help struggling homeowners and the situation is changing very rapidly. What was not possible two months ago (loan modifications) may now be possible. Lenders are going to great lengths to figure out how to help - not because of political pressure (as our government would have you believe) but out of self-preservation. Your very first step if you are in trouble is to contact your lender and tell them what's going on. Your second step is to get professional advice.
If I can elaborate on any of these or other related subjects please send me an email at mmullin@TheLoanConsultant.com or give me a call at 509-252-9151.
Need some advice from an experienced lender/Realtor.
I've had a short sale in progress for six weeks and was making great progress. I had the second lienholder reduce their position from $160,000 to $16,000 but was having trouble getting the first lienholder (Chase) to respond at all. Time passed and without me knowing it, the sellers' attorney advised them to file for bankruptcy. The offer is for $214,000.00. Chase is owed $197,000.00. With fees, commissions, etc. Chase would have to discount their position to $180,000 to make things work. However, with the bankruptcy filing, I'm wondering where things will go? Any suggestions on how to move forward? Chase had just ordered their payoff, title work etc., I thought we were close to a conclusion on this. The buyer is an all cash buyer also.
Dennis, that's a pretty frustrating situation and I wish I had an answer - I'm betting the BK filing takes all negiations off the table. Hopefully not.
Please report back what you find.