The best advice: Don’t ignore your situation
Most people who sign a mortgage don’t intend to walk away from it. Still, unforeseen circumstances, huge medical bills, lost jobs, divorce or eroding property values, can overwhelm even the best-intentioned borrower. A simple twist of fate can leave you facing a homeowner’s worst nightmare: foreclosure Communicate with your lender, rest assured, where foreclosure is concerned, you and your lender are on the same side.
Lenders want your money and the interest that comes with it, not your house. If you seem to be a good risk, the lender will offer to help keep your mortgage afloat. But be forewarned, if you seem like a bad risk, the lender may cut its losses by taking steps to foreclosure and evict you as quickly as possible.
The key is to contact the lender before your debt gets the better of you. The sooner your lender knows of your problems, the more help it can provide.
The Foreclosure Spiral
The foreclosure spiral begins when your loan payment becomes 16 days overdue. At that point, your mortgage servicer will try to contact you to work out a repayment schedule to bring your loan current.
If your first payment becomes 30 days delinquent and the next month’s payment looks doubtful, collection attempts begin in earnest. If your payments fall 90 days behind, the servicer will likely refer your mortgage to an attorney or other entity that will initiate formal foreclosure proceedings.
Here’s a timeline of the foreclosure spiral for most of the banks.
Mortgage payment due today, the first of the month. Borrower misses it.
Late charge assessed on payment. Mortgage servicer starts attempting to make contact to find out what happened.
Servicer sends “demand” or “breach” letter to the borrower pointing out that terms of the mortgage have been violated. Borrower given 30 days to resolve the situation by paying the delinquent amount.
Servicer refers loan to foreclosure department. Hires local attorney or other firm to initiate foreclosure proceedings. Depending on the state where the home is located, the servicer’s representative may record a formal notice of foreclosure at the local courthouse, publish details of debt in the local newspaper, attend hearings on the case and make appropriate court filings.
House sold at foreclosure sale or auction. Wide time range due to different state requirements.
Borrowers in states with judicial foreclosure, or those in which lenders have to retake property titles via the court system, can get almost a year to straighten out their affairs before the sale. Those in nonjudicial states have as little as two months.
After the sale, some states grant borrower a “redemption period” in which they can still rebuy the property if they have the money. Others force consumers out immediately following the auction.
Ways to avoid foreclosure
Here are some options your lender may offer you if you miss a payment and want to avoid foreclosure:
Repayment plan: If you suffer a short-term financial setback (expensive car repairs, a medical emergency), your lender may provide some breathing room by agreeing to let you pay off your missed payments in two installments over the next two months.
Loan Modification: Mortgage servicers can adjust the terms of your loan, most often by lengthening the amortization schedule, lowering the interest rate or rolling the delinquent amount into the loan and reamortizing the new balance to help you bring the loan current.
Short Sale: The lender allows you to sell the house for less than the outstanding loan amount, takes the proceeds and forgives any remaining debt.
Short Refinance: The lender forgives some of your debt and refinances the rest into a new loan. Refinance with a “hard money” loan: You won’t like the high rates and fees of a hard money loan, one from a private lender, but it may buy you time to sell your home and avoid foreclosure.
With homeowners defaulting on their mortgages at a record pace, many people are practically begging their lenders for some form of relief or assistance in order to prevent themselves from ending up on the street. While it is certainly disconcerting to receive collecting letters and threats of impending foreclosure from a lender, those who are falling deeper into debt and enduring difficulty making their monthly payments need not despair. The “short sale” is one alternative worth considering as a viable means for resolving your debt with the lender and dealing with a home that is no longer affordable. Here are some basics you need to know before starting the short sale process.
What is a Short Sale?
A”short sale” occurs when the net proceeds from the sale of property is not sufficient to satisfy the outstanding mortgages on the property, and the seller does not have the financial ability to make up the difference. The lender is asked to take less than the full amount owed in order for the sale to be completed.
What Causes A Short Sale?
Sometimes a short sale is brought about because the homeowner borrowed more than he/she could afford to pay back and miscalculated his/her financial status. Often, the short sale arises because of an unforeseen change in the homeowner‘s life such as a long-term illness, disability, divorce or loss of employment, which has dramatically affected the person’s income such that the mortgage payments are no longer affordable.
Why is the short sale a viable option for the seller?
A foreclosure can have a devastating impact on someone’s credit report that has a lasting effect for years to come. A short sale is typically on a credit report as a debt that is “settled for an amount less than what is due”. While this will cause a dip in credit score, it will be nowhere near as harsh as the reporting of a foreclosure.
Why would a lender agree to a short sale?
The answer is very simple: Lenders do not want to owe houses. Lenders are in the business of loaning, money not in the business of stockpiling real estate. There have been numerous reports that banks can faces of up to $50,000.00-$60,000.00 in actually foreclosing on a property. From a business standpoint, the lender will make out better if the property is put on the market and given an opportunity to attract a buyer through private sale.
How does the short sale process work?
Most lenders have a short sale package containing documents that the seller must submit in order to have the short sale approved. Such documents include: hardship letter from seller/borrower explaining why the short sale is necessary, seller’s financial statement, two most recent pay stubs, two recent bank statements, two most recent tax returns, copy of an agreement of Sale with buyer, copy of proposed settlement (HUD-1) demonstrating net monies to the lender. Once the package is submitted to the lender, a negotiator is assigned to the file who handles the short sale on behalf of the lender through closing.
Miscellaneous Point to keep in mind.
• If you find a buyer, don’t expect closing to take place quickly. It may take 60-90 days or longer, depending on the lender, to get approval from the negotiator for short sale to go forward.
• Lenders are not properly staffed to handle the number of short sale request. In order to make sure that your file doesn’t linger on someone’s desk, you need to be persistent, your agent or your attorney should make frequent call to the negotiator in order to insure that short sale moves forward.
• You must negotiate for the release of both the property and the underlying personal debt secured by the note. If you fail to do this, the lender may not forgive the personal debt.
• It is wise to consult with an attorney and real agent who has been through this process before and has significant experience working with lenders. Also, attorney’s fees come out of the lender’s net proceeds. Therefore, you will not have to pay out of your own pocket for an attorney to assist you in the transaction.
Options available for short sale sellers
HAFA: In this program, qualified households who participate in this program (which has both short sale and deed-in-lieu of foreclosure options) receive $3000 at closing. (Fannie Mae and Freddie Mac also participate in HAFA.)
Bank of America Cooperative Program: In this program, qualified households that participate in this short sale program will receive $2500 at closing.
Wachovia: Wachovia Bank frequently sends borrowers letters asking them to participate in a short sale and offering an incentive in the letter. Sellers should read their mail and save the letters so that they can redeem the incentive at closing (usually between three and five thousand dollars).
Litton: Litton Loan Servicing frequently sends borrowers letters asking them to participate in a short sale and offering an incentive in the letter. Sellers should read their mail and save the letter so that they can redeem the incentive at closing (usually between three and five thousand dollars).
Chase Bank (and Citi and SPS): Chase Bank is now sending certain borrowers letters offering them the option of participating in a short sale for a significant incentive (offer between $20,000 and $40,000 dollars). Read the fine print on the offer and follow all the rules in order to receive this incentive at closing.
While these are by no means all of the incentives available, they are definitely the most common ones, and, with all of these options on the table, it’s more likely than ever sellers may select short sale over foreclosure. So, now might be as good as any to consider short sales as a viable component of your plan for 2012.
Unless the bank has agreed upfront to accept a short sale, which is rare, no one knows for certain, not the buyer’s agent, not the listing agent nor the seller if a short sale offer will be accepted or rejected by the bank. Simply because a listing is advertised as a short sale does not mean it is a short sale. It means the listing agent and seller hope it will sell as a short sale and the bank will take the offer.
Short Sale List Price
The list price of a short sale home generally has very little bearing on the actual price a bank may accept. The list price may be too high to attract an offer or too low for the bank to accept. Some agents advertise short sale at unbelievable prices, in hopes a buyer will be enticed to submit an offer. Moreover, just because the seller may accept the offer does not mean the bank will agree to that price.
Why Banks Reject Short Sale
Banks demand a plethora of documentation before approving a short sale. Contrary to popular belief, sellers do not need to be in foreclosure or have fallen behind in making mortgage payments, for a short sale to occur. Here are some reasons why banks rejects short sale request.
Short Sale offer Price is Too Low
Banks will request an appraisal, sometimes several appraisals, and may also order a BPO. When the listing agent submits the short sale offer, the agent should also include a comparative market analysis that justifies the price in the short sale offer. Be prepared to argue with a rejection and show comparable sales that support the short sale offer price.
The Short Sale Package is Incomplete
Ask any short sale specialist and you’ll hear horror stories of how banks lose documentation. In some cases, it doesn’t matter how many how many times the package is expressed overnight or faxed, the bank might misplace it. Worse, an important document might not be in the file, and without every single required document, the sale will not be granted. Most big Banks such as Bank of America, Citi, Wells Fargo, Ally, and Chase required all document to be uploaded into a program called Equator, this will prevent any lost of document, because you will always have a copy of everything.
The Buyers Does Not Qualify
Sometimes, the bank won’t realize it no longer holds the mortgage on the property until many months have passed by during short sale negotiations. If the bank has sold the mortgage to another lender, the bank has no authority to approve a short sale because it has released the asset. Although the seller may continue to receive statements from the bank, the bank might be servicing the loan but not own it.
Real estate agents are not attorney and cannot give advice on legal matters always consult with your attorney, because in some cases the I.R.S. could consider debt forgiveness as income, and there is no guarantee that a lender who accepts a short sale will not legally pursue a borrower for the difference between the amount owed and the amount paid. In some states, this amount is known as deficiency. An attorney can determine whether your loan qualifies for a deficiency judgment or claim.