A long and perilous road

Woodstock couple fighting to avert foreclosure, get out of upside-down mortgage

CRYSTAL LAKE – Carlos and LaRae Alvarado were served with foreclosure papers at their Woodstock townhouse on Valentine's Day.

The couple and their two children are fighting the foreclosure in court while exploring the possibility of a short sale. A short sale is a deal with the bank that allows the homeowner to sell the home for less than the value of the mortgage.

For the Alvarado family, it might be the best way to avoid foreclosure and get out of an upside down mortgage.

Amid a continued decline in home prices that has put nearly a quarter of Americans underwater on their mortgages, the short sale has emerged as a popular alternative to foreclosure. But experts warn that it can be a long, complicated process that stains credit history reports.

The first step in the short sale process is getting the house on the market. Little can happen until an offer is made on the property, said Joe Rutkowski, short sale manager for Heritage Title Co. in Crystal Lake.

Once an offer is made, it will likely take three or four months for the sale to be completed. This is due, in part, to the amount of paperwork involved, Rutkowski said.

After the offer, the bank will order a broker price opinion, which is an opinion as to what the property is worth. With a BPO in hand, the lender can consider the offer and possibly make a counteroffer.

"Some deals will fall through at this point," Rutkowski said. "It's not a fire sale, but buyers can get a discount."

The Alvarados bought near the height of the real estate market in 2006 and moved in two days after their second son, Nolan, was born. When they signed the mortgage, their monthly payment was $1,369.

Two years later, they were told their property had been wrongly assessed for taxes and they should have been paying $1,669 a month, LaRae Alvarado said. The higher payment wasn't out of reach, but they were already behind because of the incorrect assessment. They sent in a $2,300 check to try to catch up.

Then, in late 2009, the couple got an offer for a home loan modification plan. To participate, they had to make four monthly payments of $929, fill out some paperwork, and be accepted into the program.

They weren't accepted. One letter said they weren't eligible because they "did not make all of the required payments."

LaRae Alvarado was able to prove all the payments had been made on time, but other denials followed. Several said the couple made too much money to participate in the modification program. When a letter saying they were $7,408 behind on their mortgage came in the mail, the Alvarados hired an attorney. They feel like the were tricked into a loan modification plan that put them even farther behind, LaRae Alvarado said.

"It's constant stress," she said. "Every month you get another piece of paper threatening to take away your house."

With an offer pending on the townhouse, the couple has their hopes pinned on a short sale.

But even that won't be easy.

"If this goes through, we're out of a house. We can't buy another house and it's hard to rent with bad credit," LaRae Alvarado said. "We're back at square one. It's ridiculous."

Even though the term "short sale" won't show up on a credit report, it likely will take a toll on a seller's credit history and credit score, said Rod Griffin, director of public education for Experian, a global information services company.

"A short sale is typically not as bad as a foreclosure, but you're really splitting hairs at that point," he said. "A short sale is going to have a very negative effect on your credit score. It will probably make it difficult or impossible to qualify for new credit in the near future."

In the long term, there are some advantages to a short sale in terms of credit, Griffin said.

"Your credit score will recover a little more quickly than with a foreclosure," he said.

A foreclosure will remain on a person's credit history for 7 years after the foreclosure filing date. With a short sale, it's 7 years from the first missed payment, Griffin said.

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