As we emerge from the economic recession, many homeowners have still been left in challenging financial positions. Navigating the foreclosure process can prove stressful, and identifying alternatives to foreclosure is tricky. THERE IS FREE LEGAL ADVICE! A short sale is one alternative to foreclosure.
In a short sale, the home owner, real estate professional, and lender work together to form an agreement to sell a home at current market value; this agreed upon value is typically below the existing balance on the home owner’s mortgage. The property is able to transfer hands to a new owner, removing the overhead and risk from the lender’s portfolio and relieving the existing home owner of the burden of an underwater mortgage.
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WHAT IS A SHORT SALE?
A short sale occurs when you sell your home for less than the balance remaining on your mortgage. It is important to understand that a short sale must be approved in advance by your lender. If it is approved, the holder of your mortgage agrees to accept the proceeds of the sale and to cancel the mortgage.
You may also be eligible for the federal government’s Home Affordable Foreclosure Alternatives Program (“HAFA,”) which offers short sale and deed-in-lieu options. For more details on HAFA eligibility requirements, visit www.makinghomeaffordable.gov.
WHAT IS A DEED IN LIEU OF FORECLOSURE
A deed in lieu of foreclosure is a legal document signed by the homeowner to voluntarily transfer ownership of the property to the lender in exchange for a release from the loan. This is sometimes referred to as “giving the property back to the bank.” This option is only available if the lender agrees to accept the deed and to cancel the mortgage.
In some situations, if your mortgage is owned by Fannie Mae, you may be able to lease your home after signing a Deed in Lieu of Foreclosure. Even if your loan is not owned by Fannie Mae, there may be a similar leasing option offered by your lender. deed in lieu of foreclosure is a legal document signed by the homeowner to voluntarily transfer ownership of the property to the lender in exchange for a release from the loan. This is sometimes referred to as “giving the property back to the bank.” This option is only available if the lender agrees to accept the deed and to cancel the mortgage.
In some situations, if your mortgage is owned by Fannie Mae, you may be able to lease your home after signing a Deed in Lieu of Foreclosure. Even if your loan is not owned by Fannie Mae, there may be a similar leasing option offered by your lender.
WHO HOLDS MY MORTGAGE?
In the old days, you applied for a home loan from a bank, and that bank held your promissory note and deed to secure debt until the day the loan was finally repaid in full. Now, it is common for banks to buy and sell home loans. Your note and deed may be sold, transferred or assigned at any time to someone other than the bank which gave you the loan. This could be another bank, or even an institutional investor. If you are not sure, you have the right under federal law to write and ask for the name, address and contact information of the company that currently holds your mortgage. At the end of this webpage, you will find form letters that you can modify to fit your particular request.
WHAT IS A LOAN SERVICER?
A loan servicer is a company hired by the lender to handle the day-to-day business of communicating with homeowners, sending out bills and keeping track of payments, escrow accounts, insurance, property taxes and the like. The loan servicer is the company that sends you a monthly statement, and to whom you send your monthly payments. Not all lenders use a loan servicer; some lenders do their own loan servicing. To make things even more confusing, many of the largest loan servicers are also banks! The name and contact information of your loan servicer will appear on your monthly statement.
WHAT IS A LOAN MODIFICATION?
A loan modification is a written agreement between you and the holder of your mortgage to change the original terms of your mortgage (such as the length of the loan, principal balance, or interest rate). If you obtain a permanent loan modification, then your monthly payment may be reduced to a more affordable amount. You apply for a modification in much the same way that you apply for a loan, by providing personal and financial information, tax returns, proof of employment, etc. If your numbers meet the numerical formula used by the lender, then your application will be approved and your loan terms will be changed. If not, then your application will be denied, and you will still be bound by the terms of the original loan. Please be aware that in some cases, the length of the loan or the principal balance may be increased in return for a lower interest rate and monthly payment.
Some lenders allow homeowners to participate in a trial modification program while their application for a permanent modification is being considered. Please be aware that if your application for a permanent modification is denied, the lender may demand that you pay the difference between your original monthly payments and the trial program payments. Moreover, if the homeowner is delinquent in making payments under the trial modification program, it is almost certain that the application for a permanent modification will be denied.
Many lenders have their own loan modification programs, with their own formulas and requirements. The federal government’s Home Affordable Modification Program (“HAMP”) is designed to help homeowners who are experiencing a financial hardship. If you are found to be eligible for HAMP, then your loan may be modified to make your monthly mortgage payment no more than 31% of your gross monthly income. For more details on HAMP eligibility and requirements, visit www.makinghomeaffordable.gov.
But be warned: applying for a loan modification may not stop a foreclosure. There have been instances where homeowners have had their homes sold at foreclosure while their modification applications were still pending. You should take action immediately if you receive a notice that your home will be foreclosed on by the holder of the mortgage.
WHAT IS THE “MAKING HOME AFFORDABLE PROGRAM”?
The Making Home Affordable Program is a federal program administered by the United States Department of the Treasury and the Department of Housing and Urban Development. It offers several options for homeowners, some of which are available through private lenders, including:
Refinancing mortgage loans through the Home Affordable Refinance Program (“HARP”);
Loan modifications for first and second mortgage loans through the Home Affordable Modification Program (“HAMP”) and the Second Lien Modification Program (“2MP”);
Providing temporary assistance to unemployed homeowners through the Home Affordable Unemployment Program (“UP”); and
Offering other alternatives to foreclosure through the Home Affordable Foreclosure Alternatives Program (“HAFA.”)
Georgia is a “non-judicial foreclosure” state. That means the lender can foreclose on your home without filing suit or appearing in court before a judge. The procedures for foreclosure are spelled out in the Official Code of Georgia, Sections 44-14-162 through 44-14-162.4.
Foreclosure begins with a default under the terms of the original promissory note or deed to secure debt. Usually the default is your failure to make the required payments on the loan. A default can also occur due to things such as failing to maintain property insurance or pay your property taxes.
Next, the holder of your mortgage must send notice to the borrower of its intent to foreclose. The borrower will not get much advance notice – Georgia law requires that the notice be sent at least 30 days before the date of the proposed foreclosure sale. The notice must be in writing and include the name, address and telephone number of someone who has authority to negotiate, amend, and modify the terms of the mortgage with the borrower. The notice must also be sent to the borrower by registered or certified mail or statutory overnight delivery, return receipt requested and include a copy of the advertisement of the foreclosure sale that will be published in the official county newspaper for public announcements. Refusing to accept a notice sent by registered or certified mail is a bad idea; it will not invalidate the notice.
The holder of your mortgage must publish notice of the foreclosure in the official county newspaper for public announcements where the real property is located for four consecutive weeks prior to the scheduled foreclosure.
If it has not already done so, the holder of your mortgage must file proof that it owns title to the security instrument related to the real property with the clerk of the superior court of the county in which the real property is located, prior to the start of the foreclosure sale. This proof is usually in the form of an assignment of the promissory note and deed to secure debt. Since mortgages are often sold or assigned, this requirement may assist the borrower with identifying the current holder of their mortgage.
The foreclosure sale will take place on the courthouse steps in the county where the property is located. By law, foreclosure sales take place on the first Tuesday of the month between the hours of 10:00 a.m. and 4:00 p.m. Bidding is open to the public, but the mortgage holder often is the only bidder. The mortgage holder will sign a deed of foreclosure to the winning bidder, which may well be itself. At that point, the winning bidder becomes the new owner of the property.
WHAT HAPPENS AFTER THE FORECLOSURE SALE HAS TAKEN PLACE?
A valid foreclosure wipes out the borrower’s right to live in the house. The new owner of the property may file a dispossessory action to evict the borrower from the home. Some lenders have a “cash for keys” program, in which they will pay homeowners a small amount to voluntarily leave the property.
In most cases, the mortgage holder accepts the property in satisfaction of the loan, and foreclosure marks the end of legal proceedings against the borrower. However, the holder of the mortgage may file suit against the borrower to recover any difference between the amount paid for the property at the foreclosure and the amount remaining on the promissory note. This is called a deficiency proceeding. If this happens, the matter will go before the courts.
If you believe that you have been the victim of a wrongful foreclosure, then you should seek legal advice as soon as possible from a private attorney or legal aid organization. If you do not have an attorney, you may wish to contact the State Bar of Georgia at 404-527-8700 or 1-800-334-6865 to obtain the telephone number for a referral service in your area. Alternatively, you may be eligible for free legal services. For those residing in the Atlanta metropolitan area (Clayton, Cobb, DeKalb, Fulton and Gwinnett counties), please contact the Atlanta Legal Aid Society at 404-377-0701. For all other Georgia counties, please contact the Georgia Legal Services Program at 404-894-7707 or 1-800-822-5391.
WHAT IF I AM A TENANT IN A HOME THAT HAS BEEN SOLD AT FORECLOSURE?
vUnder the federal “Protecting Tenants at Foreclosure Act of 2009,” Pub. L. No. 111-22, 123 Stat. 1660, a tenant with a bona fide lease has the right to stay in the home after foreclosure, and must be given at least ninety days’ notice to move out. The Act does not apply if the tenant is the borrower, or a member of the borrower’s immediate family. It is scheduled to expire at the end of 2012.v
ARE THERE ANY SPECIAL LEGAL PROTECTIONS FOR ACTIVE DUTY MILITARY PERSONNEL?
The federal “Servicemembers Civil Relief Act,” 50 U.S.C. Sections 501 through 596, limits the rate of interest that may be charged to military personnel on active duty, and imposes limitations on a lender’s right to pursue foreclosure or legal action. This Act applies to active duty military personnel who had a mortgage prior to enlistment or prior to being ordered to active duty, including members of the Army, Navy, Marine Corps, Air Force, Coast Guard; commissioned officers of the Public Health Service and the National Oceanic and Atmospheric Administration who are engaged in active service; reservists ordered to report for military service; persons ordered to report for induction under the Military Selective Service Act; and guardsmen called to active service for more than 30 consecutive days. Dependents of servicemembers also may be entitled to protections in some cases. For more information, please call the military information number at 1-800-342-9647, or visit HUD’s website at http://www.hud.gov/offices/hsg/sfh/nsc/qasscra1.cfm
WHO CAN HELP ME AVOID A FORECLOSURE?
In the metro Atlanta area, the Consumer Credit Counseling Service of Greater Atlanta, the Fannie Mae Foundation, the Homeownership Preservation Foundation, NeighborWorks America, and the United Way have joined together to provide free counseling to Georgia homeowners to provide consumer education and to prevent home foreclosures. This foreclosure prevention program offers a toll-free 1-888-995-HOPE hotline. The hotline is staffed 24 hours a day by counselors who provide free, confidential advice for those facing foreclosure. Homeowners who want or need in-person counseling will be referred to local organizations. Counseling is available in English and Spanish. Visit their website at www.995hope.org.
The U.S. Department of Housing and Urban Development (“HUD”) and Fannie Mae have launched websites to assist borrowers who are having difficulty with their mortgages. HUD’s website is at http://www.hud.gov/foreclosure/index.cfm. While a good deal of this information may apply to all homeowners in danger of losing their homes, not all of the foreclosure avoidance options mentioned may be available to you if you have a VA or conventional loan.
If you are having trouble making your mortgage payments due to unemployment or underemployment, then you may wish to apply for assistance from the Georgia Department of Community Affairs' "HomeSafe Georgia"program. For more information, visit www.homesafegeorgia.com.
SHORT SALES DON’T ALWAYS CANCEL THE REMAINING DEBT ON THE MORTGAGE
You may be surprised to learn that a short sale does not automatically cancel your obligation to pay off the remaining debt on your mortgage. There are two parts to your mortgage. The first part consists of your promise to repay the lender. The second part secures the loan, creating a lien on your property -- in other words, if you break your promise to repay, the lender has the right to have the property sold to pay off the loan.
So, when a lender approves a short sale, what is the lender agreeing to do? At the very least, the lender is agreeing to remove or release the lien on the property. A seller would have a near impossible task in selling a property without this lien release.
Is the lender also agreeing to cancel the seller's obligation to repay the loan in full? Not necessarily. Some lenders ask sellers to sign new, unsecured promissory notes before approving the short sale. Other lenders, without asking for new promissory notes, reserve their right to collect the deficiency -- the remaining balance of the debt -- within the fine print of their short sale approval documents (which you might not even see until the property sale is nearly due to close). After the short sale closes, the lenders start collections proceedings against the borrowers. Other lenders assign the debts to collection agencies, which then go after the sellers for repayment after the short sale closes. But in some states, first mortgages are non-recourse loans, meaning that you can't be sued for a mortgage deficiency after a short sale.
To be certain that you will not be on the hook to make any more mortgage payments after your short sale closes, ask your lender and get their answer in writing. If your lender refuses to give you a straight answer, contact an attorney to see if there are any state laws prohibiting your lender from collecting the deficiency -- and whether your lender has a history of complying with that law. (Some major lenders have been known to simply reinterpret the law in their own interests.)
A SHORT SALE WON’T SAVE YOUR CREDIT SCORE
Saving your credit score may be the most touted reason for choosing to short sale your home rather than letting it be sold at a foreclosuresale, but the reality is that a short sale is not much better for your credit score than a foreclosure. According to myFICO, the consumer division of Fair Isaac (the company that invented the FICO score), short sales, foreclosures, and deeds-in-lieu of foreclosure are all "not paid as agreed" accounts and are considered the same for purposes of your FICO score. For additional information on short sales, see Nolo's article Short Sales and Deeds in Lieu of Foreclosure.
SHORT SALES: MORE THINGS TO THINK ABOUT
Still can't decide if a short sale is right for you? Here's some more food for thought.
You have other options. Short sales can take a long time and a lot of work, with no guarantee that they will close in the end. Before embarking on a short sale, you may want to contact your lender about other foreclosure alternatives, such as refinancing your mortgage, modifying your loan, or negotiating the terms of a deed-in-lieu of foreclosure. Like short sales, each of these other options has its own set of drawbacks and benefits to consider before proceeding.
Is time on your side? Make sure you have enough time to sell your home. As mentioned above, short sales can take a long time, usually months, to close. Will you have enough time to market the property, find a buyer, and negotiate with your lender for approval before your house is foreclosed on? Short sale negotiations with your lender, or even your lender's approval of a short sale, will not automatically stop that lender's foreclosure process. Contact your lender and the trustee managing the foreclosure process about postponing any scheduled foreclosure sale to give your short sale enough time to close. The flip side of the time question is that, while most short sales take months to close, yours may be the exception and close quickly. Like any home sale, once the short sale closes, you will have to move. If your primary goal is to stay in your home for as long as possible, letting the home be sold at a foreclosure sale may be a better option for you.
You'll need approval before you close. Is there a second loan on your home? Is your mortgage covered by insurance? Do other creditors hold liens on your property? You most likely will need the approval of all parties with an interest in your property to close the short sale. This is bad news because the time and effort needed to close a short sale increases exponentially with each additional interested party. In this situation, you should identify all parties with an interest in your property and contact them early in the short sale process.
Short sale fraud. The increase in the number of short sales taking place is leading to a rise in incidents of short sale fraud. To learn how to avoid becoming a victim of short sale fraud, see Nolo's article Short Sale Fraud: Three Scams to Avoid.