With the economy currently seeing little recovery, distressed home sales continue to rise in the Chicago area. Sales of distressed homes and condos – which are generally homes in which the owner is behind on mortgage payments and facing possible foreclosure or short sale – increased 16 percent in the fourth quarter of 2011 compared to the previous quarter, and rose 25 percent from the same quarter the year before, according to RealtyTrac.
Further illustrating that the mortgage crisis is far from over, during the final three months of 2011 a total of 7,347 home sales in the Chicago area were the result of short sales or foreclosures – accounting for 28 percent of all homes sold.
Unfortunately, this trend will likely continue in 2012. Brandon Moore, ReatlyTrac CEO, recently said in a statement, “We expect to see foreclosure-related sales increase in 2012, particularly (short sales), as lenders start to more aggressively dispose of distressed assets held up by the mortgage servicing gridlock over the past 18 months.”
Because this trend is unlikely to alter course anytime soon, it is important that those Chicagoans behind on their mortgage payments know their options to avoid the detrimental impact a foreclosure can have on their finances and credit report.
Deed in Lieu of Foreclosure
One option to avoid a formal foreclosure in Chicago is a deed in lieu of foreclosure. Basically, a deed in lieu of foreclosure is when the homeowner and lender agree that the lender will accept the deed for the home “in lieu” of the lender foreclosing on the home.
This choice is generally a good option for homeowners. It provides relief from unmanageable mortgage payments, does less damage to credit scores than a normal foreclosure, and it also protects them from deficiency judgments by the lender. A deficiency judgment arises when the lender sells the home at a foreclosure sale for less than the value of the mortgage. Although this option will not save the home, it may free up money to pay off other debts incurred by the homeowner.
For example, imagine a couple named Blake and Crystal who purchased a $500,000 home in Winnetka in 2007. They take out a $400,000 loan which has a monthly mortgage payment of $4,000. In late 2011, both Blake and Crystal lose their jobs and fall behind on mortgage, which currently has a principal balance of $350,000. If Blake and Crystal can get their lender to agree to a deed in lieu of foreclosure in Illinois, they will no longer be liable for the $350,000. Also, Blake and Crystal will not have to worry about the lender coming after them for more money – even if the lender is only able to sell the home for $300,000. And even though Blake and Crystal were unable to save their home, they have now freed up the money they would have spent on their mortgage to pay off other debts and to save for a down-payment on a new home.
Unfortunately, getting the lender to agree to a deed in lieu of foreclosure is not always easy, especially if there is a second mortgage on the home. If there is a second mortgage, the lender will have to negotiate with these other lenders, making it less likely that the original lender will agree to the deed in lieu of foreclosure in the first place. This is why it is important to speak with an experienced attorney to negotiate on your behalf. Not only can the attorney negotiate for you, but they can advise as to whether a deed in lieu of foreclosure is even your best option to begin with. For example, it may be better for the homeowner to pursue a Chapter 13 bankruptcy, especially if the homeowner wants to keep their home.
