Q: My nephew is underwater with his mortgage. He owes $115,000 on a townhome worth about $85,000. He just lost his job, but is current on the mortgage payment. Can he quitclaim the property to the bank that holds the mortgage and avoid foreclosure?
A: Your nephew can avoid foreclosure on his home in any of several ways. The first is to sell the home to a buyer and have his lender to agree to the short sale. The second is to work with the lender and give the property to the lender in a deed-in-lieu of foreclosure. The last way to avoid foreclosure is to continue to make payments on the mortgage.
It seems very unlikely your nephew can maintain his payments without a job. However, if he finds a job quickly and continues to make his mortgage payments on time, foreclosure won't be an issue.
But if his job prospects seem bleak, he should find a good real estate broker to list his home as a short sale. If he prices the home aggressively, he may find a buyer. Once he does, he will need to see if his lender is willing to accept the amount offered by this buyer to allow the sale to continue.
If the lender agrees to the short sale, your nephew can see if the lender will agree to waive any claim on the deficiency. In some states, a lender can't go after the borrower if the property is sold through foreclosure, even if the sale doesn't cover the borrower's debt. However, if the borrower volunteers the property back to the lender, in some states the lender may be able to go after the borrower for the deficiency.
Finally, if your nephew can't sell the property, and the lender is unwilling to take a deed in lieu of foreclosure, your nephew may lose the property through foreclosure.
More borrowers are falling into foreclosure these days, and their credit histories and credit scores are falling. But while a good credit history is important, it shouldn't be the driving factor behind what your nephew decides to do.
Most borrowers generally get into trouble with their credit histories and credit scores well ahead of a foreclosure. Usually, a borrower fails to make three or more payments on a mortgage before the lender begins foreclosure proceedings. The longer the payments remain unpaid, the greater the affect on the credit history and credit score.
While it's better for your credit history to avoid foreclosure, a deed-in-lieu of foreclosure or short sale is only marginally better. In either of those alternatives, a consumer's credit score and credit history will take a hit, albeit perhaps less of a hit than in a foreclosure.
Your nephew should consider all of these options carefully before deciding what to do with his property. There will be some impact on his credit history and score, but if he won't need access to credit in the next few years, he'll have time to build it back.
He may also want an attorney or certified nonprofit credit counselor to walk him through the options available in the state where he lives.
Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce R. Glink's latest book is "Buy, Close, Move In!" Distributed by Tribune Media Services
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