Distressed Homeowner Issues: Understanding Your Options

5 min read

Distressed homeowners often do not understand all of the options available to them and can become overwhelmed, sometimes to the point of giving up. Unfortunately, failing to take action on a distressed property usually makes the situation go from bad to worse. A good analogy is putting a Band-Aid on a serious infection and expecting it to heal on its own. Left untreated, it can become far worse and require surgery. Don't underestimate the severity of the situation you are in.

To best understand your options, it is wise to consult an attorney experienced in foreclosure defense and loss mitigation. He or she can advise you based on your specific situation. For example, in Florida you hold title to your home from the moment you purchase it until the Certificate of Title is issued during the foreclosure process. Some people believe that once a foreclosure has been filed the home has already been "foreclosed" and is owned by the lender. That is simply not true.

This means you are still responsible for the property. Even if you move out, issues of liability, taxes, and HOA or condo fees remain yours. Even people who declare bankruptcy and surrender the property sometimes discover that they still carry some liability that cannot be released after the discharge. This often comes as a surprise.

Assuming you do not qualify for a loan modification (due to income constraints, property type, and similar factors), you will need to prepare to vacate the property at some point in the future. While this can be delayed with good legal counsel, many loan modification requests end in frustration and few meaningfully reduce the total amount owed. If you owe more than your home is worth, a loan modification may allow you to stay, but it may not be a sound financial decision. You do, however, have options.

Depending on your goals, you may have options to stay in the home longer or to exit on better terms. Which path is right — and the timing involved — depends on your finances and the specifics of your case, so these are decisions to make with a licensed attorney.

If You Want to Move On Quickly

Other homeowners simply want to get the property out of their name and move on. If that is your goal, consider the following:

• To minimize the effect on your credit, it is best to pursue a voluntary transfer of title. This can be done through either a short sale or a deed-in-lieu. If the lender is willing to take back the title (deed) and release you from any remaining debt, this is a good path. It usually works only when there are no other liens or mortgages against the property. A short sale, in most cases, also releases you from the remaining debt. If there is more than one loan on the property, or other liens, those will need to be negotiated as well.
• Do nothing and allow the lender to foreclose. This option usually leads to problems over the remaining balance after the sale. The lender can pursue a judgment and begin collection efforts to attach your bank accounts and assets to collect that balance, and your credit can be affected for years.
• Sell the property for as much as you can get and pay the remaining balance to the lender out of your own funds.