Suppose you had to get rid of a house because of a job transfer, major illness, divorce, imminent foreclosure or other emergency. In a soft housing market, how would you do it?
Perhaps you'd be fortunate enough to sell relatively quickly at a small discount. But if that's not feasible, there are three other options: a short sale or deed-in-lieu of foreclosure, a strategic default, or literally giving the house away.
A short sale allows a homeowner to sell the home for less than the amount owed on the mortgage. However, the lender's approval is required. And a short sale can take a year or longer to close, said Tony Marriott, a broker associate at Show Appeal Realty in Phoenix.
The home's condition and the real estate broker's experience in negotiations are key factors. But price may be the most delicate issue in the long run.
"If you get too aggressive with price, you'll get a contract, but you'll get pushback from the seller's lender," Marriott explains.
If you don't want to put your house on the market or can't get short-sale approval, you can try to negotiate a deed-in-lieu directly with the lender. The pace of this process -- in which you sign over your ownership of the house to the lender to avoid foreclosure -- depends on the situation and the lender's response. But again, it's unlikely to happen quickly.
A short sale or deed-in-lieu will hurt your credit score, and you'll be required to disclose your financial information to the lender. The lender may demand a promissory note that would obligate you to repay some portion of the loan after the sale or loss of the property.
A strategic default occurs when a homeowner who can afford to make the mortgage payment suddenly decides not to do so because the home's value has fallen dramatically below the loan balance.
This approach can work, but it isn't fast or easy, according to Jon Maddux, CEO of YouWalkAway.com and a strategic default consultant in Carlsbad, Calif. "If someone is trying to get rid of a house in a hurry, a strategic default or walking away isn't going to be the answer for them," he says.
In fact, a strategic default can take a year or longer, depending on state laws and how quickly the lender might be able to sell the repossessed home.
Delays surrounding the foreclosure process mean homeowners often can stay in the home for up to two years before being evicted. In some cases, owners may be able to sock away as much as $30,000 or $40,000, Maddux says.
Some homeowners maintain the lawn and pay the homeowner association dues or property taxes. Others live in the house essentially for free. "When they come out the other end, they aren't destitute. They have a little money to take care of their family," he says.
But the drawbacks of a strategic default go beyond the questionable ethics of refusing to pay your mortgage. They include wrecked credit, tax consequences and difficulty getting a new mortgage for years after the default.
The fastest way to unload a house is to simply give it away. That may sound facetious, but some well-to-do people do give real estate as a gift, according to Martin M. Shenkman, an estate and tax planning attorney in Paramus, N.J.
"If you have a house that may have been worth $2 million a couple of years ago and can be legitimately appraised at $1 million today, wow, get rid of it," he says.
The most common scenario is the gift of a family vacation home from parents or grandparents to the younger generation. A gift may be preferable to a quick sale because if the property were sold, the owner would receive the cash -- but the family would no longer be able to use and enjoy the home.
A simple gift requires only some paperwork that Shenkman says can be prepared by an attorney or, in some states, a title company, in a few hours. The work is more complicated if the home is owned by or given to a family trust. A property appraisal is recommended.
Mortgage rates ticked up slightly this week. The 30-year fixed mortgage averaged 4.46 percent in Wednesday's weekly Bankrate survey, up 4 basis points from the previous week's 4.42 percent, which was an all-time low. A basis point is one-hundredth of a percentage point.
The average jumbo 30-year fixed is up 4 basis points, to 5.08 percent.
Other benchmark mortgages showed a similar pattern -- of slight increases but remaining at historically low levels. The 15-year fixed rate mortgage climbed 3 basis points to 3.84 percent. And the popular 5/1 adjustable-rate mortgage rose 5 basis points to 3.62 percent. With a 5/1 ARM, the interest rate is fixed for the first five years and then adjusted annually for the remainder of the loan's term.
Distributed by Scripps Howard News Service. Contact Marcie Geffner at editors(at)bankrate.com.)