3 paths to take when facing foreclosureWhat's the best way to avoid ruining my credit?
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2/1/2007
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DEAR BOB: I'm behind on my mortgage payments and probably
will be foreclosed. People have told me to (1) do a "short sale" of
the property, (2) give it back to the lender with a deed in lieu of
foreclosure, or (3) proceed to foreclosure and then file bankruptcy. Please
explain the pros and cons of each. Do I have to have a short sale before I can
do a deed in lieu of foreclosure? What if I sell the property at market value,
but that's not enough to pay all the debts? --Napin E.
DEAR NAPIN: A "short sale" means you sell the
property for less than the mortgage balance at its market value and the mortgage
lender agrees, in advance, to accept the net amount as payment in full to
satisfy the mortgage.
Purchase Bob Bruss reports online.
Lenders can be very difficult about agreeing to a short
sale. You need a listing agent experienced with short sales who can deal with
your lender and who will insist you receive absolutely nothing from the sale.
Most mortgage lenders will not accept a deed in lieu of
foreclosure. The reason is the lender then takes title "subject to"
any liens or encumbrances you might have incurred during ownership. However, if
you can prove to the lender there are no junior mortgages or other liens
affecting title, such as unpaid property taxes, your lender might accept this
alternative, which is cheaper for the lender than foreclosure.
If you let the property go to foreclosure sale, why file
bankruptcy? That makes no sense unless you have other extensive debts such as
credit cards you just can't afford to pay. Should you file bankruptcy while the
foreclosure is pending, that delays foreclosure but doesn't prevent it.
Filing bankruptcy can be a major mistake, which will haunt
you for years. Before you can file bankruptcy, federal law now requires you to
get credit counseling.
If you sell the property at market value but that's not
enough to pay off the mortgage and other costs of the sale, you can pay the
deficit out of your pocket and walk away happy that you don't have a
foreclosure, short sale or deed in lieu of foreclosure on your credit reports.
Talk to your lender now to work out the best solution for both parties.
WHAT IS A LIFE ESTATE?
DEAR BOB: Several times recently you mentioned a "life
estate." What is that? --Mary D.
DEAR MARY: A life estate creates a legal right for a person
to occupy but not own a property for the lifetime of that life tenant. Life
estates are often created, for example, to provide a place to live for a
surviving spouse, child or other person after the property owner dies.
For example, if a husband owns a house in his name alone as
his separate property he might provide in his will or living trust the title to
his house shall pass to his daughter -- but subject to a life estate for his
wife if she survives him. The daughter is called a "remainderman"
(probably a remainderperson to be politically correct). Until the widow dies,
the remainderman daughter owns an "expectancy."
A life-estate tenant has the duty to maintain the property
and not commit "waste." The life tenant must also pay the property
taxes and the mortgage interest if there is a mortgage (but the remainderman
pays the mortgage principal portion of each payment). For more details, please
consult a local real estate attorney.
AN INSTALLMENT SALE IS GREAT WAY TO MINIMIZE TAX
DEAR BOB: We bought a rental house at a distress sale in
August 2004 at a very reasonable price. Now we want to sell it to our oldest
son and hold the mortgage. What is the best way for us to avoid capital gains
tax? --Rose Mary W.
DEAR ROSE MARY: Carrying back an installment-sale mortgage
is a very smart way to minimize your capital gain tax by spreading the tax out
over the years you receive payments from your son. You will be earning in
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