How Can I Protect Against Foreclosure?

When foreclosure threatens, what are your options for keeping your home?

Loan Modification is the most well known way to stay in and keep your home if you get behind on payments.  There are a number of programs depending on your lender and servicer that you may qualify for and also if Freddie Mac or Fannie Mae own your loan(s).

Is there a way to protect yourself legally?

When faced with the loss of one’s primary asset, one’s home, there are two considerations you must address before structuring a move: (1) What is my deficiency liability to the lender? and (2) What is my debt relief tax liability following the loss of my home?

The answers to these questions will be state specific, however, in California you must analyze whether the foreclosure is Judicial or Non-Judicial in nature.  Only by way of a Judicial foreclosure may a lender pursue you for a deficiency judgment.  If the lender in your case is pursuing a Non-Judicial Foreclosure the foreclosing lender waives the right to come after you for any deficiency on the note.  Be careful here and note if you have a second on your home and the first forecloses, the second may still pursue you for the deficiency on its note even though the first gave up that right by foreclosing non-judicially.

Next ask yourself if the mortgage on your home is comprised of “purchase money” or not?  If so, you have something in California known as Anti-Deficiency Protection—meaning the lender cannot pursue you for the deficiency even if it wanted to. This applies to purchase money seconds as well.

Now in California, the best way to protect oneself from a deficiency liability to the lender is to short sale one’s home.  Senate Bills 931 and 458 were passed in California to prevent lenders that participate in the short sale process from coming after the borrower for any deficiency liability.  This makes the short sale a fool proof protection from deficiency liability to the lender.

Next, what is one’s tax liability for the loss of one’s home?  You see, the IRS and Congress in their ultimate wisdom have a rule that taxes the amount of debt relief you received on your home loans.   So if you took out a $500,000 loan and the home is only worth $250,000, you will have debt relief of $250,000.  At a 30 percent tax rate, that could have tax consequences to you of $75,000.

Until December 31, 2012, under the act that Congress passed in December 2007 known as the “2007 Homeowner Debt Relief Act” you are forgiven for the debt relief tax incurred on your principal place of residence.  This does not apply to vacation homes, investment homes, or second homes however.  In any event, you will need to seek the advice of a CPA that is proficient in the Homeowner Debt Relief Act to see what the potential tax consequences are for you upon the disposition of your home, whether by short sale or foreclosure.

California has also placed its own debt relief rules to expire with the Federal Government’s on December 31, 2012.

When is it smart to concede to a foreclosure?

It is never smart to concede to a foreclosure.  First, if you have a non-purchase money second it may pursue you for the deficiency, whereas if you short sale the home instead you can eliminate that threat.

Second, foreclosure has a more severe impact to your FICO credit score than, does a short sale, e.g. foreclosure is on your credit report for 10 years, short sale on for seven (7).

Third, most importantly you cannot qualify for financing a new property purchase under Freddie/Fannie guidelines for four to six (4-6) years following a foreclosure; it is two to three (2-3) following a short sale.

Unless your tax professional gives you a reason to foreclose, as opposed to short sale, you should always short sale if possible in California.

Can a realtor or real estate lawyer help prevent foreclosures from happening?

Yes, both can depending on their roles.  A realtor can help assist you with the short sale process.  An real estate attorney can make sure the foreclosure process is being done appropriately and according to code, and can make sure there are no other irregularities with your particular case and set of facts.

What about taking advantage of foreclosed houses?

It  is a buyer’s market, and foreclosures can be a cheap way of acquiring real property.  However, typically the California Civil Code §1102 disclosures about the property given to the buyers when purchasing a single family home are not provided by the lender following a foreclosure.  In these cases it is strictly caveat emptor—buyer beware.

Are there any legal requirements for buying a foreclosed house?

As stated previously, you want to be very careful and inspect very carefully when purchasing a foreclosed property.  Many times lenders will have addenda that they attach to the purchase agreement wherein you give up substantial legal rights by purchasing the home from it.