For families facing foreclosure the situation may seem truly hopeless.
You might not only lose the home you've worked so hard for, but a severely damaged credit score can put your future in jeopardy, too.
But there is help out there and it’s possible to avoid some of that long-term impact.
It may not always be possible, and it requires you to be very proactive.
“You panic we had trouble sleeping at night, you try to figure out what you’re going to do,” Ann Marie Lahndorf said.
Lahndorf and her husband were renting a home out, when all of a sudden the renter left without notice. At the same time, her husband was losing his job in the RV industry.
So they got an estimate of the second home's value.
“We were completely shocked at what the home would sell for and we knew we were in trouble,” Lahndorf said.
Now, that home, and the one they lived in, appeared to be in jeopardy.
"Nobody expects to find themselves in this situation, but unfortunately a lot of people in our area are now and its good to know you have options you don't have to do a foreclosure,” Lahndorf said.
“People that are losing the house, they’re desperate. They need help. Some of them don’t even know that they need help, or that there's help available,” said Evelyn Johnston.
Johnston is an Elkhart realtor that has adapted.
“I started in short sales, because that's where the market was headed,” Johnston said.
In a short sale, you put the home you're not able to afford on the market, and try to get an offer.
It can be for less than what you owe, and sometimes the bank will take it.
“In my experience the banks don’t even want to talk to me unless I have an offer on the property… (but) as long as I can document that it is a reasonable offer, the banks are taking them,” Johnston said.
The Lahndorfs got Johnston's name early on in their situation, and felt relief.
“She said you don’t have to foreclose on your home, there are people that are out there looking for homes, looking for deals,” Johnston said.
Johnston was able to sell the second home, and the bank accepted an offer for between $30,000 - $40,000 less than they owed.
“I mean you never go into a financial obligation expecting that you're going to ask someone to take such a significant loss in their investment that they've made in you as your creditor… But in the end somebody else got a home that they needed, the mortgage company got a significant amount of their money, we didn't have any credit repercussions, because we didn't have to do a foreclosure,” Lahndorf said.
“It’s not good for the banks, but it is for the homeowner. However, the banks have earned such large interest rates for so long, everyone has the right to earn a profit, but now it’s their turn to give back to the communities,” Johnston said.
The Lahndorfs were able to avoid a big impact on their credit score, because they were so proactive in seeking help.
If you're too far behind on your payments – in default - a short sale will still hurt your credit score significantly, possibly even as much as if you went through foreclosure.
However, there is one advantage across the board; you would be able to buy a home again much sooner than if you went through foreclosure. It could be as soon as 2 years with good credit in the interim, compared to 5-7 years, or longer, after foreclosure.
Also, if your home goes to a sheriff’s sale, you can be stuck with what’s called a deficiency judgment. For example, if you owed $100,000 on your home, and it sold at a sheriff’s sale for only $70,000; you could still be held accountable for the remaining $30,000. The $30,000 is the deficiency judgment. That judgment can follow you, and the bank can even garnish your wages years into the future. Many banks will waive that deficiency judgment if you’ve secured an approved short sale.
However, another silver lining is that HUD certified counselors tell us many banks are not pursuing those deficiency judgments lately, even after a sheriff’s sale. There is a significant amount of court documentation that can become costly for the bank. Meanwhile, it is very difficult to collect from those who owe the deficiency judgment, because most of them have little to no income at this time.
Now again, we want to remind you there are numerous HUD certified counselors in our area who can help you through this process for free. We have a list of the contact information for those counselors, just follow the link below.
They say you should never pay for loss mitigation help.
The first thing the counselors will do is find out whether you can find a way to afford to keep your home, or whether a short sale may be your best option.
Tomorrow, in Part 3, we'll get more specific about what kind of options people may have to try to save their home.
Depending on how much your bank works with you, there are a lot of different possibilities.