In February, 2009, the Obama Administration introduced a program to help United States homeowners avoid foreclosure. This program, called Making Homes Affordable, intended to assist upwards of 5 million homeowners in a distressed situation be able to keep their homes and have foreclosure options. As of early fall of the same year, the Obama Administration admits there are only about 200,000 loan modifications initiated.
Homeowners are eligible in the local Indianapolis real estate market for this program but are they even aware of it? Are they unable to qualify? Across Indiana and the rest of the nation, one projected reason why this program doesn’t appear to be as successful as intended yet is because borrowers have been found to be ineligible. The number of Indianapolis homes for sale that are in a distressed state appears to be holding steady in some parts of Indianapolis, such as the Northern suburbs. However, if you are facing no more options in keeping your home, what final choices do you have? The following are three options:
1. Short sale. Here the lender allows acceptance of less than what the owner has left on his mortgage.
2. Foreclosure. Where your home becomes the property of the lender.
3. Deed in lieu of foreclosure. Without proceeding to foreclosure, here the borrower turns over their home to the lender.
There is some debate as to which of these options is best for the owner. Some REALTORS® are of the opinion that a short sale is the best way to go. Two reasons given for this are that a short sale can sometimes cause less negative effect to an owner’s credit and that a short sale provides the owner less time to have to wait for purchasing another home.
There isn’t necessarily the evidence to back up the claim by either Fair Issac (who developed FICO, the system of credit scoring) or by other significant credit providers that the short sale of foreclosure options will less seriously affect a credit score. While this is not surprising, it is still curious where this claim can be firmly validated. Those closely connected to Fair Isaac have even been quoted as saying that credit bureaus view foreclosures and short sales as equals and as major delinquencies. In turn, they have been known to cause the same amount of damage to a FICO score.
In terms of when a borrower would be eligible to again to purchase a property after defaulting on a Freddie Mac or Fannie Mae loan, Fannie may released a statement in the summer of 2008 to address this issue. For deeds in lieu of foreclosure and foreclosures, in their policy there is distinction between if the need to pursue foreclosure options was by extenuating circumstances (such as critical illness) or if it was for another reason (such as financial irresponsibility).
If extenuating circumstances are found, you will have to wait for three years to purchase with another Fannie Mae loan. Otherwise, the time to wait will be five years. With the deed in lieu of foreclosure option, the waiting time is two years with extenuating circumstances and four years without. The short sale option has the same waiting period as a deed in lieu of foreclosure.
During the summer of 2009, updates have been made to the Making Homes Affordable plan to provide financial incentives, among other options, to homeowners in distress who participate in a short sale or who grant a deed in lieu of foreclosure, and who otherwise match requirements of eligibility.
Facing losing your home is a frightening time. If you’re faced with this situation, contact a REALTOR® or other professional to help you with your options.