Short Sale Foreclosure Alternatives

by 'Need Help' from USA

Ask Kate for HAFA short sale foreclosure alternatives, deed in lieu, and deed for lease vs strategic default: Hi Kate, We need the best option. HELP! We have never missed a mortgage payment and have never been late. It's not that we don't want to make our payments. But why should we pay on a house that is appraised for $100,000 less than we owe?


'Need Help' continues... We will never have equity in our lifetime and want out. What should we do next? Stop the mortgage payments? Short Sale? We have many questions.

Kate Answers: Strategic Default vs HAFA Deed in Lieu, Deed for Lease, Short Sale Foreclosure Alternatives

***zz-portrait-left.shtml*** Dear 'Need Help',

I'm sure walking away from your home, commonly known as strategic mortgage default, is not a consideration you take lightly.

Categorized as a moral decision by some, a financial strategy by others, I understand everyone must choose what they feel is best.

But I dare say, as much as a homeowner would try to claim that walking away from a home is a financial strategy, foreclosure is still bound to be a gut wrenching experience.

Not only that, the three major credit reporting agencies will continue to report your foreclosure for at least 7 years. But if getting out from under the weight of negative equity is your goal, here are some options.

Four options for homeowners faced with underwater mortgages and negative equity...

  1. Real Estate Short Sale

  2. Deed in Lieu

  3. Strategic Mortgage Default

  4. Deed for Lease

1. Real Estate Short Sale

Real estate short sale makes it possible to sell a home when there is little to no equity and even negative equity.

Your real estate agent will negotiate with your bank to accept a home buyer's offer that is less than your mortgage balance.

One danger of short sales, though, is the threat of deficiency judgements. This means you could be held ultimately responsible for the difference between what you owe and the sales price.

But if you go through Making Home Affordable HAFA program, the deficiency is guaranteed to be waived.

(By the way, HAFA stands for Home Affordable Foreclosure Alternatives.)

To participate in the HAFA program for short sale and deed in lieu, you must have an existing HAMP mortgage loan modification (see below) or a home loan owned or guaranteed by Fannie Mae or Freddie Mac. (Find out if Fannie Mae or Freddie Mac owns your mortgage.)

Initial eligibility with HAFA also requires that:
  • You have a financial hardship.

  • In the last 12 months, you haven't bought another home.

  • Your loan balance is less than $729,750 on your first mortgage and it originated before January 1, 2009.
The next step is to contact your mortgage servicer to see if you qualify for HAFA. But you should also check with your accountant for short sale tax consequences.

If short sale (as well as deed in lieu) is executed through HAFA, $10,000 (increased from $3,000) is paid to the homeowner to help with relocation expenses.

2. Deed in Lieu

What is deed in lieu? When a homeowner voluntarily turns over the deed to their home, ownership transfers back to the mortgage company. Because the the bank did not incur the cost of foreclosing on the homeowner, some claim this option will be less damaging to credit scores than mortgage foreclosure.

See notes under real estate short sale for advantages to using HAFA for your deed in lieu transaction, as well as the requirements.

Call your loan servicer to get started or a HUD housing counselor at 888-995-4673. There is no charge for the counseling. Consult your accountant for deed in lieu tax consequences, as well.

3. Strategic Default

When the homeowner opts to walk away, especially in the face of large monthly house payments and negative equity, this is called strategic default and ends in mortgage foreclosure.

Check with your accountant for strategic default tax consequences, as well.

But besides leaving behind the key and walking out the door, are there additional options for homeowners with underwater mortgages that will allow them to keep and afford their homes? I'll get to that in just a moment but first, let's discuss deed for lease.

4. Deed for Lease

The deed for lease program is another option intended at making it affordable to remain in homes. Fannie Mae runs this program and at least one large servicer, Bank of America, is offering the option directly to homeowners.

During the deed in lieu process, the homeowner is contacted by a property management company. A homeowner can apply to lease back the home at customary rents in their area.

Besides meeting the qualifying criteria, the homeowner should respond promptly or deed in lieu will commence and the property will need to be vacated.

Five more options for homeowners faced with underwater mortgages and negative equity...

But what if homeowners with unaffordable mortgage payments want to save their homes in spite of negative equity? Here are options to consider:
  1. New HARP 2.0 Refinancing

  2. HAMP Phase 2 Loan Modification

  3. FHA Short Refinance Option

  4. FHA Streamline Refinancing

  5. Waiting for Proposed Obama Streamline Refinancing
I hope having this guide alleviates some of the stress. I also hope you will come back to comment on your progress.

Good luck in your decision and best wishes,


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