A Short Sale Specialist Discusses Factors That May Increase Your Risk of Foreclosure
Disclaimer: I am a Realtor who specializes in short sales and this article and video are my opinion based on my own subjective experiences. I am not an attorney. I am not an accountant. The materials presented herein are not legal, tax or financial advice. Use this article as a starting point and be sure to independently verify all facts on your own. You’re encouraged to seek out experts (attorneys and accountants) to answer questions about your specific situation. The information I provide here is based on my experiences as a real estate licensee involved in short sales. Also, state and federal laws change often and vary based on your circumstances and state of residence. As a Realtor, I cannot promise future profits or losses. However, the information I present may give you insight and food for thought. Educate yourself and identify factors that led to others falling into foreclosure to help protect your family.
As a short sale specialist and a Realtor in Portland, OR I’ve helped hundreds of clients complete a short sale and have helped resolve all of the situations below through home owners working with my team and cooperating with real estate attorneys and tax professionals when appropriate.
Beware of the cash-out Refi & HELOC
Bankers need to make quotas for new loans so they may pester you, offering thousands of dollars in easy money in the form of Refi (Refinancing) or HELOC (Home Equity Line Of Credit). As a short sale Realtor I witnessed the financial wreckage of hundreds households and in my experience, defaulted HELOC’s were among the worst mistakes I witnessed people make. The HELOC’s low payments and easy terms make it very easy to rack up thousands in debt. It always starts innocently with people lowering payments by paying off car loans, reducing student debt, dealing with credit cards, making home improvements and next thing you know you’ve accumulated another 30 to 60 thousand in debt on top of the mortgage.
For some people, a cash-out refinance or HELOC provides convenient money and their income or other finances means they can keep it under control. But, even for responsible home owners, I’ve witnessed bad situations turn into devastating financial hardships because HELOC loans have so many ways to pursue the debt even after the first mortgage bank forecloses. Don’t get me wrong, I settle all types of short sale debt and I have an outstanding success rate at settling HELOC’s and cash-out second mortgages but it’s important to realize that with a HELOC, the stakes are higher and the financial risks are much greater than a simple one loan short sale.
Because HELOC’s have this extra ability to pursue the debt even after foreclosure, the HELOC bank will demand a much higher settlement amount compared to other mortgages. Also, if housing dips again, having a HELOC increases the chances that you won’t have any equity left which would force you into foreclosure or short sale.
Paying mortgage with a credit card
Paying off a secured debt with an unsecured debt may prove to be a very risky move. As a short sale specialist I’ve seen many bad situations made worse when home owners paid the mortgage with their credit card; only to fall back into foreclosure when the card maxed out. The problem with paying a mortgage with a credit card is that if your money trouble doesn’t quickly resolve, you’ve just gone deeper into debt and now face even more money trouble. If you end up maxing out and defaulting on the credit card, the credit card company will often seek a judgment against you and attach the credit card debt to your house and other assets. As a short sale specialist, I’ve personally witnessed home owners who ended up getting foreclosed on because they dug themselves deeper and deeper into debt by paying their mortgage with their credit card until the card ran out. Next, the owner had trouble completing a short sale because the maxed-out credit card defaulted and became a judgment that clouded the title to their property.
A bill collector gets a judgment so they can get any money the home owner would make off selling their house. The problem is, when the house is already upside down on the mortgage all the judgment does is put a big roadblock in the way of getting a short sale approved. As such, credit card judgments make it much more difficult to finish a short sale while also greatly increasing the chances of a home owner being forced into bankruptcy, foreclosure or both. Insult to injury, I’ve witnessed foreclosed home owners lose the house and end up in a small apartment, choking under a mountain of credit card debt (tip: maxed out credit cards and/or judgments make it hard to even rent an apartment).
On the other hand, if that home owner had not used the credit card to pay their mortgage they would have a better chance at a short sale and not gone into more bad debt. Also, the owner that uses the credit card to pay the mortgage is also dragging the pain out for another year or more. Why waste another year of your life barely surviving and being miserable? Rip the band-aid off and move on.
Zero-down home loans are amazing*: but there’s a catch
*If you can truly afford the loan, a zero-down home loan may allow you to keep money in the bank to be better prepared for future hardships. However, the lack of equity means you may not have enough padding to be able to sell the property if something goes wrong. USDA rural housing, VA loans for those with military service etc offer low interest rates and the chance to save money by not making a down payment. These loans have many excellent features and may be a great way for some people to preserve capital by putting the money you would have used as a down payment in a savings account may give your family an extra safety-net for future hardships. However, you still need to plan on saving up some money to set aside for unexpected home repairs and other life challenges. It may be wise to put the money you would have used as a down payment in a savings account so you have a cushion to protect your family when bad things happen. As a Realtor I’ve witnessed buyers write zero-down offers where a simple repair comes up and the buyer can’t proceed because they don’t have enough money for basic, low-cost repairs. To me, this is insanity. If you can’t afford to fix a water heater you have no business buying a house (zero down or not).
As a real estate agent I’ve witnessed buyers back out of zero-down purchases over simple repairs because the buyer had no savings. So, what happens when the buyer with no savings buys a house and a few months later there’s a surprise repair? Does that buyer go into more debt? Does the buyer ignore the problem, taking the risk that the problem gets worse? Repair contractors who don’t get paid for their work may attach a lien to the property, making it impossible to sell the house without settling the debt with the contractor and thereby trapping the unwary owner. For these unprepared buyers, even a minor hardship could immediately push them toward foreclosure. I’m no financial planner, but I think if you can’t afford simple repair while getting a ZERO DOWN LOAN then you CANNOT AFFORD TO RESPONSIBLY OWN A HOUSE. My buyer clients usually save hundreds of dollars every month compared to renting and they also save money on their taxes at the end of the year. But, with these savings comes increased responsibility… Save money for unexpected repairs.
Nobody Has A Crystal Ball But Fortune Favors The Prepared
In closing, a real estate agent like myself can’t give you expert advice but in the scenarios above you may be able to unearth some areas that may warrant your further attention. As always, consult with attorneys and accountants about your specific scenario and if you need a Realtor who is short sale specialist in Portland, OR please call us.
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