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What’s the Best Last Resort?

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Posted On: 12/23/2009

Q: Our home is worth less than our mortgage, and we can’t continue our payments. Is a short sale a better option than a foreclosure?

A: With a short sale you sell the home to a buyer who pays less than the mortgage debt. This is only possible if the lender will agree, meaning that the lender is taking a loss on the transaction.

Neither option is a “better” option. They both damage credit and result in the loss of a home. Before choosing, ask a few questions:

• Can you qualify for assistance under the government’s mortgage modification plans? See makinghomeaffordable.gov for specifics. More than 500,000 borrowers have enrolled in the program.

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• Do you have one loan or two? If you have “piggyback” financing – if you bought the house with two loans at the same time – then you will need to negotiate with both lenders to get a short sale. If one says yes and the other says no there won’t be a short sale.

• Do you have mortgage insurance? Depending on your circumstances, the insurance company may be willing to offer a “claim advance” to bring the loan current or to lower the interest rate.

• Does the buyer want a fee or charge of some kind for “helping” with your short sale? If so, this is not a buyer, this is someone selling a service. Please check with your attorney general before signing anything. They usually have state-specific info on their Web sites.

• Do you now have an FHA loan? The FHA has an exceptional system for helping borrowers, especially if all you basically need is a lower interest rate.

• Do you have legal assistance? See if low-cost or free legal help is available from your state government, local bar association or a community-housing group.

Q: Given all the turmoil during the past two or three years, has the role of the real estate broker changed?

A: The role of the real estate broker system has become more balanced because of reforms made in the 1970s and 1980s.

It used to be that real estate brokers universally acted as seller agents. The result was a system dedicated to getting the best possible price and terms for property owners – a good deal if you were a seller but not so good if you wanted to buy.

The growing popularity of buying brokerage has profoundly changed the system. First, “standardized” sale agreements have become more balanced – or can become more balanced with the use of a buyer broker. Second, in many states brokers must now present an agency disclosure form when first meeting a would-be buyer or seller, usually a state-written document that explains the role of the broker in a real estate transaction and the options available to buyers and sellers.

The National Association of Realtors reports that 61 percent of all buyers used a buyer broker in 2008. Add in the increased use of professional home inspectors and state-mandated disclosure forms and there’s far more balance between buyers and seller than in the past.

Q: Given that home prices have fallen isn’t this the right time to sell a home without a broker?

A: When I first starting writing about real estate in the 1970s I would have been comfortable with the idea of self-selling. Today, I think most sellers are better off with a broker. Here’s why:

First, real estate deals used to be simple. The real estate contract for the purchase of my first home ran one or two pages. Today’s agreements are complex and book-like. You need a broker or attorney to fully understand what these contracts say.

Second, the market has changed. Buyers are tough to find, and most buyers are involved with brokers, so if you cut out real estate brokers you eliminate potential purchasers.

Third, good brokers know good lenders. Given today’s financial realities having a buyer is not enough; you also have to have a buyer who can get a mortgage.

Fourth, an experienced local broker knows how sales are made – not just prices but also the terms that make transactions work.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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