Sean S. Hanley
Attorney at Law for Foreclosure - Considerations
San Jose, California, Bankruptcy, Foreclosure and Debt Relief Attorney at Law since 2007. In addition to bankruptcy, foreclosure and debt relief law, I specialize in real estate transaction law and general law. Call me now for a free phone consultation at 408-293-0344.
We are attorneys at law and a licensed real estate broker and private lender who specialize in all aspects of legal and real estate services relating to bankruptcy, foreclosure, debt relief, real estate loans and real estate transactions.
Foreclosure: is there a right time to simply "walk away"?
Countless American homeowners faced with Foreclosure find themselves in what they perceive to be a desperate situation - both financially and emotionally. Many homeowners feel hopeless and are frightened, or even embarrassed at the ramifications of walking away from their homes, thereby allowing their lender to foreclose on their home. The truth is... getting deeper into debt by continuing to pay for a home with negative equity evokes the same hopeless emotions and is often more financially unwise than allowing the lender to foreclose by walking away from your property.
The light at the end of the tunnel is that you don't have to face foreclosure alone. You can enlist the services of the attorneys at Hanley Law, who are competent professionals that protect their client's interests by assisting them in preparing and strategically navigating through the sometimes complicated foreclosure process, thereby diminishing their feelings of hopelessness and restoring their peace of mind.
The first step employed by the attorneys at Hanley Law is to determine why the homeowner is facing the prospect of foreclosure because different legal implications/advice arise depending on the reason for the homeowner's default. Some homeowners are able to make their monthly mortgage payments, but choose to stop paying because, for example, the value of a property has fallen below the mortgage debt and recovery of the equity lost is expected to take years. Other homeowners simply can't continue to make their mortgage payments due to financial hardship and therefore, "walking away" from the property is their only option.
Regardless of the reason why someone chooses to "walk away" from their property, discontinuing one's monthly mortgage payments and allowing the lender to foreclose is not a decision to be taken lightly, however, it is often the smartest decision someone makes to ensuring they are on the path to a fresh financial start.
The attorneys at Hanley Law provide guidance to defaulting homeowners in regards to (1) the time period the homeowner can live in their house mortgage and/or rent-free (varies on a case-to-case basis), (2) ceasing harassing collection calls, (3) credit score ramifications, time implications for buying a home again, re-establishing credit history, and factors of a FICO score and the impact on FICO scores post-foreclosure, deed in lieu of foreclosure, short sale, and Bankruptcy, (4) the liability faced by homeowners for deficiencies and (5) other tax/legal implications post foreclosure.
Sometimes, simply walking away is not the best option. If the homeowner has debts other than their home, bankruptcy might be the best alternative. Fortunately, the attorneys at Hanley Law specialize in bankruptcy as well, therefore, information and assistance regarding bankruptcy will be provided if filing for bankruptcy happens to be the best avenue for the client to pursue.
For additional information, see Bankruptcy and Foreclosure and Bankruptcy Areas of Practice - Individual, Partnership and Corporate.
Duration one can live in house mortgage or rent free:
The time period a homeowner may live in their house mortgage and/or rent free varies depending on numerous factors, such as what type of Foreclosure is being employed and the veracity of the foreclosing lender in taking the legal steps to pursue the foreclosure.
The lender must pursue an Unlawful Detainer action against a defaulting homeowner even after the somewhat lengthy foreclosure process is complete (see Ins and Outs of Eviction). This could take months for the lender to pursue depending on the factual scenario, especially in light of the new Notice Requirements that complicate the law in this arena (see Foreclosure and Foreclosure - Guide). The attorneys at Hanley Law have worked with lenders to get additional time for homeowners to live in their property mortgage and rent-free post-foreclosure. We have also been able to get some money for homeowners by utilizing the "cash for keys" program employed by many lenders to help homeowners get back on their feet, so that the transition from their old home to a new one is a smooth process.
The attorneys at Hanley Law can give you an accurate estimate of the time period that you may be able to live in your home mortgage and/or rent-free upon your initial consultation.
One of the most infuriating aspects faced by homeowners confronted with a looming Foreclosure is dealing with lenders attempting to collect money owed. Congress has enacted the Fair Debt Collection Practices Act (FDCPA) to protect homeowners from pesky lenders. While the FDCPA contains numerous provisions intended to protect debtors, many debtors are either unaware of its existence, or know about it, yet fail to utilize its powerful provisions properly to protect themselves from lenders making collection calls.
See Debt Relief - Debt Collection Act for more information about the Fair Debt Collection Practices Act (FDCPA).
The attorneys at Hanley Law are fully aware of the rights afforded to debtors (such as defaulting mortgagors) under the FDCPA. We take the legal steps necessary to guarantee that no more harassing collection calls will be made to clients facing foreclosure, or any other collection matter.
Time Period - Eligibility to Purchase Home Post-Foreclosure:
A consumer can be eligible to obtain credit to purchase a home five years from the date the Foreclosure sale was completed.
Additional Requirements After 5 Years and up to 7 Years:
Additional requirements that apply after five years and up to seven years following the completion date are as follows,
Principal Residence: The purchase of a principal residence is permitted with a minimum of 10% down payment and minimum representative credit score of 680.
Second Home: A purchase of a second home or investment property is not permitted.
Cash-out Refinances: Limited cash-out refinances are permitted for all occupancy types pursuant to the eligibility requirements in effect at that time.
The additional requirements for foreclosure only apply from 5-7 years following the foreclosure completion date because Fannie Mae only requires a 7-year history to be reviewed for all credit and public record information. The 7-year time frame also aligns with the information provided by the borrower on the loan application relative to disclosure of a past foreclosure action.
What if Borrower has "Extenuating Circumstances" that led to Foreclosure?:
A borrower's credit may qualify them for a home loan in as little as three years due to "extenuating circumstances" that may have led to the foreclosure. The additional requirements listed above (aside from a minimum credit score of 680) still apply.
Extenuating circumstances are nonrecurring events that are beyond the borrower's control that result in sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations faced by the borrower. Non-exhaustive examples that may be used to support extenuating circumstances include documents that confirm the event(s), such a divorce decree, medical bills, notice of job layoff, job severance papers, etc, and documents that illustrate factors that contributed to the borrower's inability to resolve the problems that resulted from the event, such as a copy of insurance papers or claim settlements, listing agreements, lease agreements, tax returns for the period prior to, during, and after a loss of employment, etc.
The borrower must deliver a letter to the lender that explains the relevance of the documentation and supports the claim that extenuating circumstances existed that made it impossible for the borrower to continue making payments.
Deed in Lieu of Foreclosure - Advantages to Borrower and Lender vs. Foreclosure:
A Deed in Lieu of Foreclosure is a deed instrument in which the borrower conveys all interest in a real property to the lender via Grant Deed or Quitclaim Deed to satisfy a loan that is in default to avoid Foreclosure. In exchange for the borrower conveying the property to the lender by Grant Deed or Quitclaim Deed, the lender cancels the Promissory Note secured by the property.
The borrower needs to get the lender's permission to transfer title. Independently quitclaiming the property and recording the instrument by the homeowner/borrower will not suffice to complete a Deed in Lieu of Foreclosure. Historically, a Deed in Lieu of Foreclosure was not very common, however, the recent trend has increased lenders willingness to accept a Deed in Lieu of Foreclosure due to the high cost and time associated with foreclosure.
A Deed in Lieu of Foreclosure offers several advantages to both the borrower and the lender. The main advantage to the borrower is that it immediately releases him/her from most or all of the personal indebtedness associated with the defaulted loan. The borrower also avoids the public notoriety of a foreclosure proceeding, while also hurting their credit score less than a foreclosure. While a Deed in Lieu of Foreclosure is beneficial to a borrower in that the borrower avoids the Notice of Default on the property, unlike in foreclosure, any junior liens are not extinguished. A Deed in Lieu of Foreclosure transfers title to the lender. The lender takes title "subject to" any junior liens. For this reason, a Deed in Lieu of Foreclosure is not useful if there are multiple loans securing the real property.
See Foreclosure - Guide for a discussion on junior liens.
Lenders prefer a Deed in Lieu of Foreclosure because (1) there is a reduced time period and costs associated with a Deed in Lieu of Foreclosure in comparison to a Foreclosure, (2) lower risk of borrower revenge and (3) additional advantages if the borrower subsequently files for Bankruptcy.
Tax Implications of Deed in Lieu of Foreclosure:
A Deed in Lieu of Foreclosure is treated the same as a sale for income tax purposes. It is reported on the taxpayers tax return as a sale or exchange for the year the foreclosure is finalized or deed is given to the lender. The homeowner reports "capital gains or losses" as in the sale of other real property. Further, the homeowner is exposed to "forgiveness of debt" income.
See Foreclosure - Guide for a more detailed discussion of the tax implications.
If the debt is "recourse" (a debt for which the homeowner is liable in the event of the borrower's default), the homeowner can receive income from the amount of the debt that is forgiven by the lender. In "non-recourse" loans (where the lender's only recourse is repossessing the secured property), there is no taxable income from forgiveness of debt, but there still may be income from capital gains.
See Foreclosure - Guide for a discussion on "recourse" and "non-recourse" loans.
Impact on Credit - Time Period Eligibility to Purchase Home Post Deed in Lieu of Foreclosure:
A distressed homeowner who successfully negotiates a Deed in Lieu of Foreclosure may also be able to save his or her credit rating. Credit score impact may enable a purchase of property four years from the date the deed in lieu of foreclosure was executed. As a practical matter, Deeds in Lieu are rarely accepted by institutional lenders, unless there is a single loan and title is otherwise clear.
Additional Requirements After 4 Years up to 7 Years:
Additional requirements that apply after 4 years and up to 7 years following the completion date are as follows,
Minimum Down Payment: The borrower may purchase a property secured by a principal residence, second home, or investment property with the greater of 10% minimum down payment, or the minimum down payment required for the transaction.
Secured Transactions: Limited-cash-out and cash-out refinance transactions secured by a principal residence, second home, or investment property are permitted pursuant to the eligibility requirements in effect at that time.
What if Borrower has "Extenuating Circumstances" that led to "Deed in Lieu of Foreclosure"?:
A shorter time period (2 years from the date the Deed-in-Lieu was executed) applies if the borrower has extenuating circumstances that led to the Deed in Lieu of Foreclosure.
Time Period Eligibility to Purchase Home After Short-Sale:
A short-sale involves the sale of the property by the borrower to a third party for less than the amount owed to satisfy the delinquent mortgage, as agreed to by the lender, investor, and mortgage insurer.
The advantages to borrowers and lenders are roughly the same in a short-sale as in a deed in lieu of Foreclosure. The one main advantage of a short-sale over a deed in lieu of foreclosure is that a consumer will be eligible to obtain credit to purchase property two years from the completion date of a short-sale. No exceptions are permitted to the two year time period due to extenuating circumstances.
Please see Foreclosure - Short Sale for more information about short sales.
Time Period Eligibility to Purchase Home After Filing for Bankruptcy:
A Chapter 7 filer can be eligible to obtain credit to purchase a property four years from the date of discharge or dismissal of the Bankruptcy action.
A Chapter 13 filer can be eligible to obtain credit to purchase a property two years from the date of discharge and four years from dismissal of the bankruptcy action.
What if Borrower has "Extenuating Circumstances" that Led to the bankruptcy?:
If a Chapter 7 borrower has extenuating circumstances that led to the bankruptcy filing, the borrower will have a shorter time period (2 years) from the date of discharge or dismissal to be eligible to obtain credit to purchase a home. No exceptions are permitted after the Chapter 13 discharge.
For more information on bankruptcy, see Bankruptcy and Foreclosure and Bankruptcy Areas of Practice - Individual, Partnership and Corporate.
After a Bankruptcy or foreclosure-related action, a credit history must meet the following eight requirements to be considered re-established:
It must meet the elapsed time requirements.
It must reflect that all accounts are current as of the date of the mortgage application.
It must include a minimum of four credit references. At least one of the references must be a traditional credit reference, and one of the references must be housing-related. A housing related reference must cover the period following the bankruptcy discharge or dismissal, foreclosure, or deed-in-lieu, and can be in the form of mortgage payments or rental payments. If rental payments were not reported to the credit repositories, the lender must obtain copies of bank statements, money orders, or cancelled checks for the most recent 12-month period as a supplement to the rent verification.
It must reflect 3 of the 4 credit references, including rental housing references, as active in the 24 months preceding the date of the mortgage application.
It must include no more than 2 installments or revolving debt payments 30 days past due in the last 24 months.
It must include no installment or revolving debt payments 60 or more days past due since the discharge or dismissal of the bankruptcy or the completion of the foreclosure-related action.
It must include housing debt payments past due since the discharge or dismissal of the bankruptcy or the completion of the foreclosure-related action.
It must include no new public records since the discharge or dismissal of the bankruptcy or the completion of the foreclosure-related action. Public records include bankruptcies, foreclosures, deeds-in-lieu, short sales, unpaid judgments or collections, garnishments, liens, etc.).
The impact on FICO Score Post Foreclosure, Deed-in-Lieu, Short-Sale and Bankruptcy are as follows,
FICO Score:
A FICO score is a credit scoring system that creates a number that represents the creditworthiness of a person, or the likelihood that a person will pay his or her debts, which are sold to lenders. A FICO score is between 300 and 850 (the higher the score, the better the credit).
Factors that Determine FICO Score:
Credit scores are designed to measure risk of default by accounting for some, if not all, of the following factors in a person's financial history. Note that not all factors are weighted evenly - the number next to the factor indicates the weight that factor is given when determining a FICO score.
Payment History (35%): Late payments on bills, such as mortgage, credit card, or automobile loans, can cause a FICO score to drop, paying bills on time causes FICO score to rise.
Credit Utilization (30%): The ratio of current revolving debt (such as credit card balances) to the total available revolving credit (credit limit). Consumers can raise their FICO scores by paying off debt and lowering their utilization ratio. Closing existing revolving accounts typically adversely affects the revolving ratio, which negatively impacts FICO scores.
Length of Credit History (15%): Just like fine wine, which matures and grows in value and taste over time, as a consumer's credit history ages (assuming they pay their bills), their FICO score will be positively impacted.
Types of Credit Used (10%): FICO scores will increase if the consumer has a history of managing different types of credit (Installment, Revolving, Consumer Finance).
Recent Search for Credit and/or Amount of Credit Recently Obtained (10%): Multiple credit inquiries for a consumer searching to open new credit, such as credit cards, retail store accounts, personal loans, etc.. can hurt an individual's score. Applying for lots a new credit in a short period of time is also viewed as risky and can drop one's FICO score.
Impact of Mortgage Modification on FICO Score:
A FICO credit score is calculated from the information in consumer Credit Reports. The affect a loan modification may have on a borrower depends on whether/how the lender chooses to report the event to the credit bureau.
The system seems to be flawed as thousands of homeowners are incurring significant credit damage in the mortgage modification process due to the common problem surrounding the lack of coordination between the bank's loan mitigation department, which works with mortgage holders to modify their loans, and the foreclosure department.
Example: Bank loan modification representatives tell Johnny Homeowner he must stop making mortgage payments before applying for a loan modification as the bank won't modify Johnny Homeowner's loan until it is clear that Johnny Homeowner cannot make payments under the current mortgage terms. The problem is that as Johnny Homeowner skips payments, the bank's foreclosure department reports the missed payment to the credit reporting agencies. The result is that Johnny Homeowner's credit score takes a hit - and not just once, but rather, each and every month that a new payment is missed, which continues until the loan is paid off in full. Even if the loan mitigation department and the foreclosure department work together, it won't clear the credit damage suffered to Johnny Homeowner.
As noted above, since payment history accounts for roughly 35% of one's credit score, a loan modification may significantly impact one's credit score.
The major problem with loan modification is that the borrower can rarely do anything by themselves to help their credit scores. Professional help often must be enlisted because while negative items cannot be erased, sometimes a credit score can be improved by having positive information such as on-time payments entered on the credit report. This can be done through a mortgage lender, who contacts a company specializing in rapid re-scoring that works directly with credit reporting agencies.
Impact of Foreclosure, Deed-in-Lieu of Foreclosure, and Short-Sale on FICO Score:
Foreclosures, Deed-in-Lieu of Foreclosure, and Short-Sales are equally damaging to one's FICO score. A bankruptcy, however, may have a greater impact on one's FICO score than does the other three alternatives. While a foreclosure is a single account that one defaults on, declaring bankruptcy has the opportunity to affect multiple accounts and therefore poses a potentially much greater negative impact on one's FICO score.
Impact of Bankruptcy on FICO Score:
A bankruptcy is considered a very negative event regardless of the type being filed. A bankruptcy is factored into your FICO score until it is removed from your credit report (ten years for Chapter 7 and seven years for Chapter 13). Filing for bankruptcy can have a far greater impact on one's FICO score than a foreclosure.
Liability faced by homeowner for deficiency that may arise and other tax/legal implications post-foreclosure:
For information on liability faced by homeowners for deficiencies that may arise due to foreclosures, deed in lieu of foreclosure, short-sales, or bankruptcy, as well as other tax/legal implications post-foreclosure, see Foreclosure - Guide.
Written by Sean S. Hanley © 2011. All rights reserved.
We currently offer a free phone consultation and low flat rates for foreclosure legal services. Foreclosures range from as low as $350. for the Standard Foreclosure Service to $750. for the Premier Foreclosure Package. For a more detailed information about foreclosure services and pricing, please see Foreclosure - Services Pricing.
For a more detailed information about foreclosure, please see Bankruptcy and Foreclosure, Foreclosed Property Investment, Foreclosure, Foreclosure - Debt Relief Income, Foreclosure - Deed In Lieu, Foreclosure - FICO Score Impact, Foreclosure - Guide, Foreclosure - Mortgage Workout, Foreclosure - Senate Bill 458, Foreclosure - Services Pricing and Foreclosure - Short Sale.
For a more detailed information about bankruptcy, please see Bankruptcy and Foreclosure, Bankruptcy - Business Chapter 7, Bankruptcy - Client Procedure, Bankruptcy - Credit Card Debt, Bankruptcy - Discharge, Bankruptcy - Discharged Debts, Bankruptcy - Domicile Requirements, Bankruptcy - Forgiveness Of Debt, Bankruptcy - Frequently Asked Questions, Bankruptcy - Means Test, Bankruptcy - Personal Liability, Bankruptcy - Procedural Requirements, Bankruptcy - Required Documents and Bankruptcy - 341 Meeting.
For a more detailed information about debt relief, please see Debt Relief - Credit Reports, Debt Relief - Credit Score and Debt Relief - Debt Collection Act.
In addition to bankruptcy, foreclosure and debt relief, our firm also offers a full range of legal, real estate and loan related services including elder law, estate planning, probate, real estate exchanges, real estate loans, real estate transactions and small business matters.
If you have questions about foreclosure considerations, please do not hesitate to contact our San Jose bankruptcy, foreclosure and debt relief attorney today. Call us now for a free phone consultation at 408-293-0344 or contact us via e-mail by filling out the form on the Contacts page and a representative from our office will reply immediately.
More information: Contact Us, Bankruptcy and Foreclosure, Bankruptcy - Business Chapter 7, Bankruptcy - Client Procedure, Bankruptcy - Credit Card Debt, Bankruptcy - Discharge, Bankruptcy - Discharged Debts, Bankruptcy - Domicile Requirements, Bankruptcy - Forgiveness Of Debt, Bankruptcy - Frequently Asked Questions, Bankruptcy - Means Test, Bankruptcy - Personal Liability, Bankruptcy - Procedural Requirements, Bankruptcy - Required Documents, Bankruptcy - 341 Meeting, Debt Relief - Credit Reports, Debt Relief - Credit Score, Debt Relief - Debt Collection Act, Estate Planning, Estate Planning - Protecting Your Assets, Foreclosed Property Investment, Foreclosure, Foreclosure - Debt Relief Income, Foreclosure - Deed In Lieu, Foreclosure - FICO Score Impact, Foreclosure - Guide, Foreclosure - Mortgage Workout, Foreclosure - Senate Bill 458, Foreclosure - Services Pricing, Foreclosure - Short Sale, Homestead Law, Real Estate Exchanges, Real Estate Loans, Real Estate Transactions, Sean S. Hanley Biography