A report last week from CoreLogic showed that 25.4 percent of Chicago-area homeowners with a mortgage are now underwater—they owe more on the mortgage than the house is worth—and another 5.3 percent are near that point. There’s no way of knowing how many of those people will have to sell their homes this year, but if you’re at or near the short-sale line, the first thing to do is pull your head out of the sand.
“We can’t help clients if they’re in denial,” says Kelly Molinari a Trademark Realty group agent in Wheaton who specializes in distressed property sales (short sales and foreclosures). She says that she has been involved in hundreds of distressed sales in the past five years—about 150 last year alone. “A lot of people are hiding from the bank and worrying,” she says. “But if they are survivors, if they want to do what it takes to [get through], that’s the first step.”
Here are the subsequent steps, as Molinari sees them:
• Don’t Pay a Loan Modification Company Up Front. Molinari says that she has seen many clients who have already spent about $4,000 with a loan modification company, but to no effect.
• Get an Attorney First, an Agent Later. It’s customary to call an agent you know when you get ready to sell, but Molinari says that potential short-sellers need to begin with an attorney who can advise them. Attorneys’ high fees can be intimidating, but she notes that most lawyers who specialize in short sales will do an initial consultation at no charge and discuss payment plans then. There is no central resource for finding a short-sale attorney, but many advertise their services. Some county housing agencies provide legal resources at no charge
• Tell a Friend About Your Situation. “Being upside down on your house is so common now,” she says. “Almost anybody has somebody within arm’s length who is going through it, and they might have a good attorney or county agency they can tell you about.”
• Keep Making Your House Payment. Unless you truly can’t afford to make the payments anymore, don’t let the decline in value convince you to stop paying, Molinari says. Illinois is what’s known as a deficiency state, where after a short sale is completed, the lender can still pursue you for the amount left unpaid—as well as the bank’s expenses. That can include garnishing your wages.
• Talk to Your Lender. You may be hesitant to send up a red flag with the holder of your mortgage, but Molinari emphasizes that unless you default on the payment, lenders will not ding you. Most lenders’ websites or customer service lines have ample information about their short-sale procedures.
• Don’t Fret about the Deficiency. While the lender can go after the former homeowner for the unpaid balance of the loan, Molinari says that most lenders give former homeowners a lien-free release—meaning they won’t place a lien on their next home—and a reduced debt, payable over time. A deficiency of $50,000, for example, might end up as a $20,000 promissory note that carries no interest. Pay it all, and you are released from the rest of the debt. “They report it on your credit score, so that helps you,” Molinari says, who also notes the positive effect on the homeowner’s mental well-being. “You don’t spend the next several years looking over your shoulder to see if the bank is coming after you.”