Foreclosure 101: Foreclosure Alternatives
If you are a homeowner who has defaulted on a loan, please know that foreclosure IS NOT the only alternative. You have many other options available to you, and your individual strategy for handling your foreclosure will be based upon your particular circumstances. The first question you need to ask yourself is “Do I want to keep this house?” The answer to that question determines which foreclosure alternatives you should work towards achieving. If the answer to that question is yes, then your best foreclosure alternative would be to work with the Lender to achieve a loan modification or to refinance your loan.
Foreclosure Alternatives for People Who Want to Keep Their Homes
A refinance is where the Homeowner gets another Lender to come in and refinance the existing loan and the new Lender pays off the old Lender. In the case of a refinance, there will be a new Lender and new loan documents which results in a completely new loan transaction. There are also costs associated with refinancing such as Lender costs, underwriting costs, title insurance costs, recording costs, intangibles taxes and documentary stamp taxes just to name a few. These refinance closing costs differ from Lender to Lender and therefore, if you are going to refinance your existing loan, please be sure to ask your new Lender what the closing costs will be. In these times, many Homeowners are faced with the situation where their home is worth less than the mortgage amount. If this is the case, it is likely that you will not be able to refinance because one of the most important aspects of the loan underwriting process is the loan to value. A Lender generally will not lend more than the home is worth. Therefore, if your current mortgage balance is greater than the value of your home, your best alternative would be to try to work with your existing Lender to achieve a loan modification.
A loan modification is where a Homeowner works with the existing Lender to change the current terms of the loan. This could mean a change in the interest rate, principal balance, payment plan, maturity date, or any combination of the above. Every Lender has their own internal underwriting standards for loan modifications and loan modification requirements differ from Lender to Lender. In addition to each Lender’s individual internal loan modification programs, there are also government programs that your Lender may participate in, such as The Home Affordable Modification Program (HAMP) designed to help assist property owners. Unfortunately, the Lender will not generally disclose to you exactly what their loan modification guidelines are so you are literally going into the process blind, not knowing the qualifications you need to meet to fit within your specific Lender’s loan modification guidelines. Absent certain circumstances, a Lender is generally under no legal obligation to modify your loan. It is mostly a voluntary process based on their internal (and mostly proprietary) guidelines, and the best that you can hope for is that the information you submit to your Lender qualifies you for a loan modification program that the Lender has available.
Although criteria varies from Lender to Lender, as a very general matter, the information that you submit must establish that you have experienced a hardship which renders you unable to make your current loan payment but that if the loan is modified, there is sufficient income to enable the Homeowner to make the modified loan payment. In order for the Lender to consider your request for modification, the Lender will require you to disclose financial information including, but not limited to proof of income, assets, monthly expenses, tax returns, bank statements and other personal financial information that you are normally not required to disclose to any party, not even in foreclosure litigation. The Lender will also typically require that you submit a hardship letter explaining the reason for default and submit their own internal financial worksheet which they require to be signed.
It is important for Homeowners to understand that any information they give to their Lender can be used against them in a foreclosure proceeding. If a loan modification is denied, your Lender will now have an updated database containing all of your financial information which will make asset collection efforts, should they pursue them, much easier. The downside is that they will not consider you for a modification without disclosure of this information. It is essential that the consequences of the disclosure of financial information be very carefully considered before the Homeowner complies with the Lender’s request for the submission of financial documentation necessary to be considered for a loan modification.
The loan modification process can take up to 6 months from when you submit your information, sometimes longer. I have found that there is often no rhyme or reason to the loan modification process. You can call every week for months and get nowhere. Generally, the person that you encounter on the phone is not the one who is actually processing your loan modification paperwork so they will have little or no information for you when you call. Eventually you will be assigned to a “negotiator” who you also will likely not be able to talk with directly. In my experience, a reduction in the principal balance of the loan is not likely to happen at this time. Lenders are generally more willing to reduce the interest rate, extend the amortization of the loan and modify payment arrangements to make monthly payments affordable. Expect that the loan modification process will be long and frustrating. Unfortunately, if a loan modification is your best foreclosure alternative, you will have to endure your Lender’s process, no matter how frustrating and unreasonable it may be. Be patient! The Lender will eventually have an answer for you of whether you qualify for a loan modification and what the modified loan terms will be. If you are offered a loan modification, it is essential that you read the modification paperwork very carefully so that you are fully aware of the terms and consequences of your loan modification and your modified payment obligations. I have seen many situations where the paperwork presented to the Homeowner for a modification differs significantly from what the Homeowner was told over the phone. It is essential that all modification paperwork be carefully reviewed to ensure that you are signing up for the deal you expected.
If you are able to achieve a loan modification during the foreclosure process, in many instances, the Lender may have a “trial period” to ensure that you are going to comply with the loan modification agreed upon before they finalize your modification, dismiss the foreclosure proceeding. Once you comply with the Lender’s trial period, if any, and the loan modification is finalized. The current foreclosure case will be dismissed. If you default again, the Lender can file another foreclosure case.
All homeowners must be aware that loan modification programs vary from Lender to Lender and NO person or entity can GUARANTEE you a certain loan modification. There are lots of scammers out there who prey on desperate homeowners and purport to “guarantee” the homeowner a loan modification. They charge fees for their services and sometimes even request that you make your loan payments to them while they work on your modification. Please know that a loan modification is almost never a guaranteed deal. Although a person or entity can assist you in gathering all of the information you need to submit to your Lender and help you continually follow up with your Lender, the ultimate decision of whether a loan modification will be given is up to your individual Lender and is based upon that Lender’s internal guidelines. Beware of any person or entity that guarantees you a loan modification in exchange for payment of a fee.
Foreclosure Alternatives if You Do Not Want to Keep Your Home
In our current real estate market, chances are that if you bought your home between 2005 and 2007 and took out a loan to fund all or most of purchase the property, your loan may exceed the fair market value of your home. Sometime homeowners are upside down tens, and even hundreds of thousands of dollars. In addition, many of the loans given during the real estate boom contained adjustable rate features and over the years, the payment obligations have increased significantly, while the value of the home has decreased significantly, as has family income. Many people who have long been financially responsible are being faced, for the first time in their lives, with a situation where they realize that it will take many, many years for the values to increase enough to even out the balance existing on the loan. If you couple this value differential with decreasing or complete loss of income and a monthly payment that is unaffordable and continually adjusting upward, you may reach the financial decision that retaining the home is simply not possible under your new circumstances. In this case, a short sale or deed in lieu of foreclosure are excellent foreclosure alternatives.
The benefit of either of these foreclosure alternates is that the homeowner is able to either sell the property and/or turn it over to the Lender and avoids, going all the way through the foreclosure process. As with all good, there are negative impacts that must be considered before a homeowner elects to try the deed in lieu or short sale process. Both a short sale and deed in lieu of foreclosure will have negative impacts on your credit report. There can be tax consequences which must be carefully considered by the Homeowner with the assistance of their tax professional. In some instances, a Lender may forgive the remaining balance due in connection with a short sale or deed in lieu of foreclosure. In many cases, the Lender will not expressly forgive the difference and the Lender may still pursue you for a deficiency judgment. Any consideration of a deed in lieu of foreclosure or short sale should involve the homeowner’s consultation with someone knowledgeable in tax, asset protection and credit matters. Each homeowner’s financial situation is unique and the effect of a short sale or deed in lieu will be different for every homeowner. It is essential that a homeowner know how a short sale or deed in lieu of foreclosure will affect them in the future so that the cons can be weighed against the pros in determining the proper foreclosure alternative.
Beware Of Foreclosure Rescue Scams!!! Unfortunately, there are many people who are looking to profit by taking advantage of people who are in foreclosure or who are having difficulty with their loans. Often times, these would be “rescuers” who ask you to transfer title to your home to them, some other entity or a “trustee” of a “trust” so they can “help” you achieve a short sale or deed in lieu. Do not do this without consulting with an attorney to be sure that you are dealing with a legitimate company. If anyone who is attempting to help you resolve your loan default or foreclosure asks you to transfer title to your property to them as a condition of their “help” than BEWARE.
A short sale is the process by which the homeowner puts their home on the market for the purpose of selling it to a third party, but the sale price will be less than the outstanding balance due on the mortgage(s). In a normal transaction, in order to pass clear title to a buyer, the mortgage must be satisfied in full at the closing before the Lender will release the mortgage. Usually this can only happen if the sale proceeds are sufficient to satisfy the mortgage, plus closing costs in full or, alternatively, the homeowner brings cash to closing in an amount sufficient to make up any shortfall. If your home is upside down, a short sale approval will be necessary in order for you to sell your home to a third party. In a short sale transaction, the Lender allows the property being sold to be released from the lien of the mortgage for less than the outstanding balance owed, provided the home is being sold for fair market value and to a bona fide third party purchaser in an arms length transaction in accordance with any additional requirements the Lender imposes for short sale approval.
Each Lender has different short sale procedures and requirements. Sometimes the Lender will forgive the balance, which may result in a taxable event. Sometimes the Lender will not forgive the balance, which may expose the homeowner to the possibility of a deficiency judgment lawsuit for the remainder due on the loan. Sometimes Lenders will require that the homeowner sign a promissory note at closing for the difference between what the Lender is receiving and the balance of the loan, or some portion thereof. It is beneficial that any homeowner attempting to achieve a short sale work with an attorney and a realtor who are knowledgeable in the short sale process and can help you accomplish all of the Lender submissions and assist you in the tedious process that you must endure to obtain a short sale approval.
In order to process a request for a short sale, each Lender requires that the homeowner submit various forms of documentation such as a hardship letter, income and asset information, expenses, tax information, bank statements, a copy of the sales contract showing that it is a good faith arms length transaction, a draft closing statement and other such documentation that the Lender requires to review your request for approval of a short sale. If you have a first and second mortgage, you must obtain short sale approval from both Lenders. It is much more difficult to obtain a short sale approval if you have two different Lenders than if you just have one. A short sale takes a concerted effort and significant coordination between the homeowner, buyer, realtors from both sides, closing agent and the Lender on both the selling and buying side. If you must obtain short sale approval to sell your home, you must have a very patient buyer. The short sale approval process can take several months. Therefore, any buyer of a short sale property must be willing to wait several months to close and assume the risk that the seller’s Lender may not approve the short sale. If the buyer will be obtaining a loan to acquire the short sale property, the buyer’s lender’s loan commitment must be sufficiently locked in long enough accommodate the short sale approval process time frame and an extended closing date.
One of the most important aspects of the short sale process is your Lender’s short sale approval letter. This letter will tell you the terms of the Lender’s short sale approval and advise you of whether the balance will expressly forgiven. That is the best case scenario. If you can achieve that result, Make sure your lender acknowledges this in writing!!!However, often times, a Lender will approve a short sale but then not specifically put the remainder of the debt forgiveness in writing. If the debt forgiveness and/or waiver of deficiency judgment is not reduced to writing and acknowledged by the Lender, the homeowner MUST know that there is the potential for the Lender to thereafter attempt to obtain a judgment for the remaining balance due.
Deed In Lieu of Foreclosure
A deed in lieu of foreclosure is a process by which, instead of selling the property to a third party, the homeowner deeds the property back to the Lender in lieu of going through the foreclosure process. In the end, especially if you owe more than your home is worth, a foreclosure will result in the property ultimately going back to your Lender at the foreclosure sale. At which time, the Lender will likely have to pay the overdue taxes, insure the property, pay association fees, if any, pay for maintenance of the property, and then hire a realtor to market and sell the property. A deed in lieu of foreclosure allows the end result of foreclosure (ie, the property goes back to the Lender) without both parties incurring the time and expense associated with the entire foreclosure process so that the Lender can immediately take the steps that it will eventually have to take when it obtains the property back after a foreclosure sale.
Each Lender has different requirements for accepting a deed in lieu of foreclosure. A deed in lieu of foreclosure is generally only a viable alternative if you have just one lien on your property. If you have multiple mortgages or other liens on the property, a deed in foreclosure will be very difficult to achieve as all lien holders will have to release their lien. If not, your Lender has no choice but to go through the foreclosure process to obtain clear title.
For a deed in lieu, you will likely have to submit the same type of financial and hardship information as you would for a loan modification or short sale. Most Lenders will require that a homeowner first try to sell their property in a short sale for up to six (6) months (depending on that Lender’s specific requirements) before you can be eligible for a deed in lieu of foreclosure. There can be tax consequences to a deed in lieu of foreclosure. Documentary stamp taxes must be paid in connection with a deed in lieu of foreclosure. There will be negative credit implications. The Lender may or may not forgive the deficiency. If you are able to successfully negotiate a deed in lieu of foreclosure with a waiver of any deficiency. Make sure that waiver is in writing and signed by your lender. If the waiver of the deficiency is not in writing and signed by your Lender, like in a short sale, your Lender can commence proceedings to obtain a judgment for the balance and commence asset collection proceedings.
<>Post is a section from “Foreclosure 101: The Basics Of The Foreclosure Process In Sarasota, Manatee And Desoto County”
by Nancy Cason, Esquire, Attorney at Law with Syprett, Meshad, Resnick, Lieb, Dumbaugh, Jones, Krotec & Westheimer, P.A.
E-mail: [email protected]
Foreclosure 101: The Basics Of The Foreclosure Process In Sarasota, Manatee And Desoto County (4 Part Series by Nancy Cason)
Foreclosure 101: Foreclosure Basics (Part 1)
-> Foreclosure 101: Foreclosure Alternatives (Part 2)
Foreclosure 101: Foreclosure Defense (Part 3)
Foreclosure 101: RMFM & Conclusion (Part 4)