Options in foreclosure

Many clients indicate that they are upside-down on their property, and they are certainly not alone. I'd like to share some information to help homeowners understand their options when dealing with their property in today's market.

Upside-down means that a likely sale price, minus the expense of the sale, is less than the amount owed on the property. For instance, if someone owes $250,000 on a mortgage and is likely to receive $200,000 from the sale of that property, that person is upside down by $50,000. To be clear, upside down refers to the relationship between the property's value and what is owed, rather than the relationship between the purchase price and current price.

If an owner is upside-down on a property, the property is no longer an asset; it has become a liability. Owners who cannot afford the liability may consider mediation and possible note modification, something once only invoked when payments were missed and foreclosure was imminent. Today, note modification is a numbers game determined by factors such as a person's income, home value and note balance. Mortgage lenders, conforming to federal programs, utilize computers to present available options. Not every owner who pursues a modification will qualify. Owners will not qualify if their finances are spread too thin to manage even a modified loan.

If a loan modification isn't an option, an owner may be forced to convey the property to someone else. Listed in order with the smallest impact to a credit report first, next steps might include sale, with the seller bringing cash to close the sale; short-sale, when the buyer is allowed to buy the property for less than what is owed on the mortgage; or a formal foreclosure, in which the lender repossesses the property. Each of these four options requires working with the lender, and there is one last consideration - the deficiency balance. If the foreclosed property is sold for less than the remaining balance on any loans, the borrower may still be liable to pay the difference. Deficiency balances are negotiable.

There are some other considerations, such as the emotional impact to your family leaving their home or even the long term internal impact of not honoring the promise to pay. Some buyers are still waiting for the market to recover - which at this point appears to be a slow, steady process.

This column is really a quick overview of the process and should not be used as a checklist when making a decision, but if you are doing your research, it does capture the primary issues.

• Darcy Houghton is an attorney & resident of Carson City, NV. She may be reached at (775) 882-1777, or visit her firm's website at www.hou2plan.com.