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Managing Foreclosure

When foreclosure is unavoidable, there are several options for relinquishing ownership of the property.

Relinquishing Ownership of the Property

The two most common methods of relinquishing ownership of the property to avoid a foreclosure are a deed-in-lieu or a short sale payoff. A deed-in-lieu is an action taken by a borrower and approved by the loan servicer to deed the property to the mortgage lender instead of waiting for the forced foreclosure sale of the property. A short sale payoff is a workout arrangement in which the lender accepts all of the proceeds of the sale but less than the full loan balance in a quick sale of the property by the borrower to a home purchaser.

A homeowner should begin negotiating with the lender about these options as soon as they realize that they will not be able to remain in the home. Often, a housing counselor can help a homeowner decide more quickly when it is time to make a graceful exit. The counselor can also advise whether the legal protections available under foreclosure outweigh the alternatives.

Additionally, a deed-in-lieu of foreclosure or a short sale may have a less damaging impact on the homeowner's credit report. And while negotiating these options may take the same amount of time and effort as a foreclosure, the homeowner may feel more in control of the process and have more time to prepare for a transition. In any event, a homeowner should not vacate the property until it has been legally transferred to the lender/investor/servicer.

Home Affordable Foreclosure Alternatives (HAFA)

HAFA is a free option being offered by servicers participating in the HAMP program that provides eligible homeowners with $3,000 in relocation assistance following the completion of a short sale or deed-in-lieu transaction. Homeowners who have exhausted all efforts to obtain a modification or otherwise feel that homeownership is no longer a sustainable option, should contact their lender to learn more about HAFA and whether they qualify. Under the HAFA program, a homeowner will not be liable to the lender for the difference between the mortgage balance and the sale price of the home.

Deed-for-Lease or "Cash for Keys"

Fannie Mae is offering some homeowners the option of staying in the property on a market-rate lease once the property has been transferred via a deed-in-lieu. The program known as Deed for Lease allows qualifying borrowers up to a 12-month lease in conjunction with a deed-in-lieu.

Tax Ramifications of Foreclosure

It is important to note that there are potential income tax ramifications of foreclosure, requiring that affected homeowners seek the help of a tax professional to determine the exact impact and whether debt relief is available. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude up to $2 million as income from the discharge of debt on their principal residence in connections with a foreclosure or mortgage restructuring. The Act applies to principal forgiveness on the primary mortgage for indebtedness forgiven during the calendar years 2007 through 2012. (http://www.irs.gov/individuals/article/0,,id=179414,00.html)

Strategic Default

Ongoing weakness in the housing sector has caused an extraordinary depreciation in home values and loss of home equity leaving many homeowners owing more than their properties are worth. In response, a homeowner may consider walking away from the home, even when they have the resources to make the payments. This decision is commonly referred to as a strategic default. However, this action may result in a more serious set of consequences than for a homeowner who attempts a resolution with the lender or relinquishes ownership of the property through a mutually agreed arrangement. The homeowner considering the action of strategic default is cautioned to make an effort to contact their lender to discuss any options that may be available. They should fully weigh all of the potential consequences to their credit score, legal recourse by the lender, tax liability, and future ability to purchase a home.

Bankruptcy

Bankruptcy is another option for homeowners to consider. A homeowner should contact a bankruptcy attorney to discuss how filing may relieve financial stress.

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