bankruptsy - foreclosure - short sale?

Question

My mom is in debt and we are trying to help her out. She owes more than her house is worth. If she sold her house for it's current value she would still be $43K in debt. Her monthly income is $1000 less than she makes per month. Should we have her file bankruptsy or foreclose on her house? What is a short sale? We will probably have to buy a less expensive house and have her pay rent but how do we get rid of the house she currently has? HELP!

She owes $22K in outstanding credit card debt and then $227,500 on the first mortgage and $30K on a second for a total of $279,500. If she sold the house for what the value is right now ($236,500) she would owe $43K+ closing costs, realtor fees etc... Her monthly payments on the home (the first, second and community dues are WAY over what she can afford, over $2K. She cannot afford to stay in this house.

Answer 1

This is really tough. The housing market is taking a dive and it does not look like it will recover anytime soon.
You might conisder getting her some protection while the government decides what to do about all the foreclosures everywhere.
Investigate if she can rent the place for enough to cover her mortgage payment. Check with her lender (and other lenders) to see if you can convert some of her equity (if there is any) into cash. If so, use it to cover her payments. Talk to a lawyer to see if you can sue your lender for misrepresentation.
Selling now will depend on the local market; are there potential buyers available? If so, sell while you can (sell short). Take the loss knowing it will be worse later. It will. The market is so overpriced, this correction will probably see 20% or more loss in national value before it turns around. When it does, it will recover very slowly.
Some places will be worse than others, so check out your local situation. It may be that holding will realize value in the long term.
Good luck. You will need it.

Answer 2

A short sale is something you arrange with the lender where you sell the house for whatever price you can get right away and then the lender may waive the remaining debt ($43K in your example). This would be the best outcome because you avoid foreclosure and bankruptcy. Foreclosures cost a lender an average of $50K to complete. So if she owes more than the house is worth by $50K or more, then the lender probably won't accept a short sale deal and will just foreclose on the house if your mom can't make the payments. Then the lender will come back at your mom to make her pay the $50k less that it sold for. Then your mom would have to file bankruptcy to try and escape the $50k that would be due. It is all very costly and her credit score would be damaged for 10 years making it difficult to get any future loans. I recommend you move very quickly before home prices fall ever further and you have no hope of a short sale. Call your lender and ask for a short sale. Demand to talk to their "loss mitigation" department if they give you a hard time and chances are that they will.

*To Golferwhoworks: You need to stop being so condescending towards people. These days the price of a home in CA can lose $50K in just one quarter. It is unprecendented and who really knew the losses would be so steep? It was bankers like you who packaged and repackaged debt to inflate the money supply beyond all belief and then charged interest on all the monopoly money you created. You took fractional reserve banking to a whole new level and you should be ashamed of yourself.

Answer 3

Each state has different laws regarding filing BK and consumer rights as far as foreclosure, etc. so you will need to verify with state laws if she files BK.
The only way she can sell the home currently is if the mortgage lender allows a short sale-meaning she is asking the mortgage lender to accept less than what she owes so that she can sell the home. This is generally a LONG frustrating process, but it sounds like the only way she will actually be able to sell the property without being foreclosed on. You will need to contact the mortgage lender and fill out an application with her financials and a hardship letter and usually it is a 60-90 day response time from lender. They will have an appraiser come out to evaluate the property as well. Borrowers generally need to be in the foreclosure stage-30-90 days +late on payments before they will consider this as an option. I would recommend finding a Realtor familiar with short sales as that will make the process much smoother and your chances of getting the property sold will be much greater. Now, because she has 2 mortgages, you will need to have a short sale approved by BOTH lenders, which makes this less likely to be approved unfortunately, but it sounds like it is the only option other than foreclosure, which will remain on her credit for 7 years. IF she has not yet been foreclosed upon and a sheriff sale has not been set, she could see if the lender will consider a deed in lieu-which means your mother gives the house to the bank to avoid foreclosure. Again, because she has 2 mortgages, it will need to be agreed upon by both lenders, which makes it less likely to happen. Deficiency judgments also differ by state, and depending on the state you are in, she may be stuck with a judgment for the difference owed regardless of short sale, deed in lieu and/or foreclosure.
One last thing to consider, is again depending on state laws, if she files a BK, she may not get stuck with a judgment for the HELOC.
Many facets to her situation. I would probably obtain legal advice in your state to determine the most beneficial scenario for her.
Good Luck! It can be tough.

Answer 4

File a chapter 7 and let the foreclosure be inside the chapter 7 bankruptcy. She will not be able to buy again for at least 4 years. She had to of known that she was upside down when she signed these notes. I would think that she has a first and second deed of trust since she is so far over the equity in the home. No wonder she cannot afford the home she need to stop her spending habits and that to will all change with the chapter 7 since she will only be able to get a credit card with about a $200 limit.
Good luck to her. I can tell you this though--leopards do not change their spots and the chances of her getting back in this situation is about 85% likely. I see it every day.
I am a mortgage banker.

Answer 5

In a short sale the lender agrees to accept less than the amount that is owed to the lender on the loan.

Essentially the lender takes a loss.

In my experience the people that the lender assigns to handle short sales are new and inexperienced and have little or no real knowlecge of the current real estate market.

They tend to over estimate the fair mariket value of the home by a considerable amount.

If you want to persuade the lender to seriously consider a short sale, I recommend that you hire your own appraiser to appraise the property. Your appraiser should be a Member of The Appraisal Institute (MAI)

The Appraisal Institute and its members are recognized by most lenders as having expertise in providing accurate information with respect to the fair market value of a piece of property.

Tell your appraiser that the reason for the appraisal is to determine the fair market value of the property for the purpose of a short sale.

The lender will insist on getting their own appraisal, however the lender's generally try to save a few dollars on the appraisa and use their own inexperienced and poorly trained appraisers or the bank hires a poorly trianed and inesperienced appraiser.

the result is that the lender is misinformed about the true fair market value of the property because of the defective appraisal that it gets.

Having your own appraisal performed by an appraiser with some real espertise will help the lender determine a realistic value for the property.

That will be very helpful to you, your mother, and the lender.

As long as you price the house at fair market as determined by your real estate appraiser, you should be successful in the sale of the house.

The key is do not overprice the house.!!

Ask fair market value as determined by your appraiser and nothing more.