Ann Arbor Real Estate

Real Estate

Home Foreclosure Or Voluntary Home Surrender

Due to the lagging Michigan economy and high home foreclosure rates, many homeowners have lost significant equity in their homes. In many cases, their homes are no longer worth what is owed to the bank. Some homeowners can no longer afford their mortgage to due to a job loss or pay reduction. Some homeowners simply don't want to continue to pay on a home that has no equity. Either way, there is confusion about what happens if a homeowner turns their property back over to the bank. Will they be held liable for the mortgage balance? Will it reflect negatively on their credit? Here are the facts.

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If a homeowner should surrender their home (voluntarily or through a foreclosure proceeding) because it is worth less than what they owe on it, a mortgage company may come after the homeowner after the sale of the property for the difference between what the house sold for and what they owed on the mortgage. In Michigan, as long as a home is sold for current fair market value, the homeowner may be responsible for any shortfall that may occur.

• Example: If a person owes $175,000 on their home and the current fair market value is $125,000 and the house is sold for the $125,000 (either at the foreclosure sale or after the redemption period (when the bank has taken back the property)), then the homeowners may be responsible for the $50,000 shortfall.

However, if an individual files for a bankruptcy, either before or after a foreclosure, they eliminate any deficiency claims a mortgage company may have. Surprising to many, a bankruptcy looks much better on your credit report than a straight foreclosure. Under the Federal Housing Administration's (FHA) guidelines, you must be two (2) years past a bankruptcy filing in order to qualify for an FHA mortgage. Under Fannie Mae or Freddie Mac guidelines you must be 3 to 4 years past a bankruptcy to qualify for a more conventional mortgage. If you have a foreclosure on your credit, and have done nothing else (no bankruptcy filing) then it will typically be 5 years before you can purchase a home under FHA or Fannie Mae and Freddie Mac guidelines.

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Ann Arbor, MI Real Estate