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Understanding Shortsales and Homeowner Options
Understanding Short Sales
A short sale is when a lender accepts a discount on a mortgage to avoid a possible foreclosure auction or bankruptcy. For example: A homeowner, who is facing foreclosure, has an existing first mortgage of $500,000. The market value of the home is $350,000.
Long story short, the lender accepts the offer for $350,000 and the home is sold.
That’s a short sale.
Why are lenders so eager to take such a huge discount? Banks do not like bad loans. If they see an opportunity where they can sell the property without the huge loss of a foreclosure, they will do it. Some lenders report that if the home goes into foreclosure, by the time the home actually closes with the new buyer the lender will be lucky to have netted 50% of the original loan balance.
We’ve heard many individuals who are facing foreclosure exclaim, “They [the bank] just want to take my home away from me.” But that’s not the bottom line from the lender’s perspective? They are in the business of lending money, not owning homes. If they can accept a short sale offer and rid themselves of the bad loan AND net more vs. the home going
Homeowner Options
Statistics show that over 70% of homeowner’s who are underwater or facing foreclosure for some other reason, never contact
their lender before the foreclosure process begins. This may seem absurd, but it is a fact. Depending upon your lender, you
may have some options.
Try to make nice with your lender.
You can call your lender and ask them to reinstate the loan. You may be allowed to reinstate or make the loan current by paying a lump sum or making scheduled payments to your lender over a given amount of time. Just explain to them you had a few bad months and things are now better and most lenders will try to work something out with you.
If you call the number on your mortgage payment ticket or your bill, you’ll be talking to the servicing department. Their job is to take your money. You may need to speak with a supervisor or be transferred to their loss mitigation or retention department to truly get the assistance you need. See Appendix B for a list of lender/servicer Loss Mitigation Department phone numbers and contact information.
If you have equity and have not missed payments… refinance.
Usually the lender will refinance the existing loan and include as part of the new loan any late payments and fees that you need pay to regain control assuming you still qualify to buy the home. It would all be wrapped into one mortgage. An appraisal will be ordered and a new application is usually required.
Assuming you have no equity and have to sell, you can list your home with a Realtor who has been trained as a specialist to do short sales.
In most cases, this is your best option to achieve a graceful exit from the situation. It is almost always the least expensive to you and the least damaging to your credit. In a normal home sale the seller pays the commission to the Realtor, but not in a short sale. Your lender pays all commissions and fees…listing with a short sale specialist costs you $0.00!
You can give the property back to the lender.
If there are no other liens on the title, the lender may agree to take the property back. This process of transferring ownership from you to the lender under these circumstances is called a Deed in Lieu of Foreclosure, and is sometimes referred to as a friendly foreclosure because in essence that is what it is. You just walk away. But, now that there are so many foreclosures already in the pipeline, lenders are tightening their requirements for a Deed in Lieu. Your home must have been on the market for 90 days in many cases and you must have at least attempted a short sale. Call your lender and ask what they require, or contact your real estate professional and they can inquire on your behalf. Remember, a Deed in Lieu is STILL a foreclosure, in spite of the name and carries the same negative credit ramifications.
You can file bankruptcy.
First, you need to seek the advice of an attorney. In no way are we trying to provide legal advice. Only an attorney can give legal advice. The two most common chapters of bankruptcy are Chapter 7 and Chapter 13.
Bankruptcies are either work out or wipe out. Bankruptcy is a federal court action designed to help individuals repay their debts or eliminate their debts depending on their circumstances. Chapter 13 bankruptcies are designed to reorganize debts (work out) in an effort to repay all debt. Chapter 7 bankruptcies are geared more towards liquidation (wipe out) of assets. Both Chapter 7 and Chapter 13 immediately stop the foreclosure process and any creditors from taking further action against you. See more below.
Chapter 7 Bankruptcy
When someone files a Chapter 7 bankruptcy, all assets are frozen. The attorney creates what is called an automatic stay. Meaning everything stays put. The homeowners can't buy anything, they can't sell anything, and they can't even give away anything. If they find someone to buy their home, they can’t sell it. If they try to give away money in savings, they can't. Any unsecured debt like credit cards, unsecured loans, etc. are eliminated or wiped out. They do not exist anymore. Then the trustee or attorney who represents the court and the creditors will look at all the assets (house, car, furniture, equipment) anything of value and decide what must be liquidated to pay some of the debt that was wiped out.
If the homeowners are in the middle of foreclosure, a Chapter 7 will stop the foreclosure process. Usually banks will then ask the trustee to release the property from the automatic stay so they may continue with the foreclosure process. Once the property has been released from the bankruptcy, the foreclosure process starts right where it left off. Typically you have anywhere from 3-5 weeks until the foreclosure process begins again.
Chapter 13 Bankruptcy
When someone files a Chapter 13, they don't take all the assets and sell them. Instead they take all the monthly payments and discount them for pennies on the dollar. It's like a debt consolidation plan. Whatever amount is agreed upon has to be paid to the bankruptcy court every month for the next 3-5 years. So the homeowners get to keep their house, their cars, and all their assets. Now, as long as the homeowner stays current with the mortgage payments and pays the amount agreed upon, they will be fine. However, if any payments are missed, the trustee will dismiss the bankruptcy and the foreclosure process will begin again.
You can try to get a Loan Modification.
What is a loan modification? A loan modification occurs when your mortgage lender restructures your mortgage in order to lower your payment to a manageable amount. Typically lowering the interest rate, extending the term of the loan, and possibly reducing the principle amount owed achieve the modification. Usually a combination of lower rate and longer term achieves a temporarily lower payment. Sometimes loan modification changes can be permanent for the life of the loan depending upon your lender. A small amount of loan modifications include a principle reduction, but this is rare. The typical loan modification lowers the interest rate for a finite amount of time, such as 2% for 3 years, and then adjusts to market rates.
Loan modifications are also known as a loan restructure, a work-out plan, or a mortgage modification.
The borrower or homeowner must be facing a verifiable, documentable hardship. A hardship letter of explanation is required along with financial statements showing that the situation has changed since the loan was written.
The goal of a workout plan or loan modification is to make the mortgage affordable and sustainable for the homeowner, and to turn a non-performing loan into a performing loan for the lender. The target is for the payment to be 31% or less of the homeowner’s gross monthly income.
For information on the Home Affordable Modification Program, or HAMP and to see if you qualify, follow this link: http://makinghomeaffordable.gov/modification_eligibility.html.
If you are not currently employed, do not have verifiable income, or a verifiable hardship, it is unlikely for you to be successful in the pursuit of a loan modification. If you are unsure of what to do next, contact your real estate professional. Your trusted real estate advisor, who has been trained as a short sale specialist will be able to help you sort out your options. See Chapter 12 for information on how to reach the Real Estate Rescue Network.
Who is eligible for a loan modification?
According to the Department of Treasury: “Anyone with high combined mortgage debt compared to income or who is upside down (with a combined mortgage balance higher than the current market value of his house) may be eligible for a loan modification. This initiative will also include borrowers who show other indications of being at risk of default. Eligibility for the program will sunset at the end of three years.”
Who is NOT eligible for a loan modification? Speculators or those who bought homes for investment purposes. There are limited examples of loan modifications on rental or investment property. Loan modifications are considered on a case-by-case basis, but generally lenders who believe the owner is or was a flipper or investor have a much harder time getting a loan modification approved.
Note: As this book is being published the government is considering abolishing the HAMP program. $30 billion in Emergency Economic Stabilization Act (TARP) funds were set aside for HAMP to provide payments to mortgage servicers for modifying mortgages of struggling borrowers in 2009. According to reliable sources, 521,630 loans have been permanently modified under HAMP and the re-default rate is high. From the $30 billion earmarked for HAMP only $840 million has gone out the door.
"HAMP Termination Act of 2011" (H.R. 839) would prohibit the Secretary of the Treasury from providing any further assistance to the program but would allow assistance to continue where a homeowner was in process with an offer to participate in the program.
The www.RERNblog.com site is your best source for keeping up with current information.
Soldier Relief Act of 1940
Another possible solution is the Soldier Relief Act of 1940. When a property is owned by a person who is in the military and the mortgage payments are not made, then this relief act may stop the foreclosure.
Another possible solution is the Soldier Relief Act of 1940. When a property is owned by a person who is in the military and the mortgage payments are not made, then this relief act may stop foreclosure based on certain criteria. The person has to be in active duty in order to qualify. The mortgage loan had to be established before the soldier was called out to active duty. Not only will this stop foreclosure, but also it will stop seizure of any personal property while the soldier is actively serving and several months thereafter.
Mortgage Forgiveness Debt Relief Act of 2007
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (http://www.irs.treas.gov/irs/article/0,,id=179073,00.html) See News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage or foreclosure on your principal residence.
What does that mean? Usually, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. The Mortgage Forgiveness Debt Relief Act of 2007 allows you to exclude certain cancelled debt on your principal residence from income.
Does the Mortgage Forgiveness Debt Relief Act of 2007 apply to all forgiven or cancelled debts? No, the Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes.
What about refinanced homes? Debt used to refinance your home qualifies for this exclusion, but only up to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified.
Does this provision apply for the 2007 tax year only? It applies to qualified debt forgiven in 2007, 2008 or 2009. If the forgiven debt is excluded from income, do I have to report it on my tax return?
Yes. The amount of debt forgiven must be reported on Form 982 and the Form 982 must be attached to your tax return.
Do I have to complete the entire Form 982?
(http://www.irs.treas.gov/pub/irs-pdf/f982.pdf)
Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Attach the Form 982 to your tax return.
Where can I get this form? You can download the form at IRS.gov.
Short Payoff
A Short Sale is where the lender or investor agrees to accept an amount less than what is actually owed on the property. The criteria for a short sale approval hinges on the borrower demonstrating a verifiable long-term hardship.
A Short Payoff is when the lender agrees to release the lien (their interest) on the property and allow the property to be conveyed to a new owner. The lender agrees to accept less than the amount owed on the property to release the lien, however they extend a certain amount of credit to the borrower in the form of an unsecured line of credit or promissory note. The criteria for a short payoff requires that the mortgage be current, the borrower has great credit, the borrower had (and still can) demonstrate the ability to pay off the debt.
You are able to move out of the property and get on with your life. When would someone request a Short Payoff? When the home has lost value dramatically and the owner does not have the ability to pay the large amount to get completely out of the property. Not all lenders allow Short Payoffs, however someone will never know unless they ask.
Advantages of a Short Payoff:
§ You SHOULD receive no negative feedback on your credit.
§ You may obtain a lower interest rate on the loan. Sometimes 1-2%.
If for some crazy reason the homeowner’s ability to pay changes and they are not able to pay on the note, the credit ramifications are significantly smaller.
How to Apply for a Short Payoff
1. If possible call the lender and ask them if they will accept a short payoff. Remember you may need to talk to a supervisor or to loss mitigation directly.
2. Put together your package, this is the same information as your short sale package (See Chapter 8), however the goal is to show the lender the ability to pay not the inability to pay.
3. Do not accept the first no as the answer, and never paint a lender or servicer with a broad brush. Remember most lenders do not work with just one investor, lenders sell their loans to different investors so if Bank of America says no today that does not mean no tomorrow.
Straight Foreclosure
And finally, you can just let your home go to foreclosure. Basically you don't do anything. You leave with nothing in hand and a foreclosure on your credit report. This is without question the worst option of all.
To help you sort out what to do as a homeowner considering loan modification or short sale, ask yourself these questions:
§ Do I want to keep the house? (If yes, a loan modification could be a good solution for you… if no, a short sale is the better choice, assuming you owe more than the home is worth).
§ Do I have a verifiable and documentable income? (This is required for a loan modification, as it is a fully documented loan. If you cannot verify and document income, your loan modification will not be approvable).
§ Can I afford a payment of 31% of my gross monthly income? (Some homeowners have so much consumer or other debt load that the home loan isn’t the problem, it’s everything else).
§ What if I get a loan modification but the payment isn’t much better, and I still have negative equity? What will I do with the home then? What’s my back-up plan?
§ If I knew I could sell this home without having to cover the real estate commissions and closing costs, and have a professional agent negotiate on my behalf with my lender, would I want to keep it or sell it?
§ What’s best for my family? What’s the next step?
§ What happens if I do nothing?
§ How long can I wait before it’s too late?
into foreclosure...they will do it every time. It’s simply smart business for them. This is even more valid now that the writing is on the wall. The foreclosure crisis has reached epidemic proportions. Every day there’s a new report about the sheer numbers of shadow inventory, or homes that have been foreclosed on but haven’t gotten back on the market yet. There are millions of homes already in the shadow inventory pipeline. Banks are not anxious to increase those numbers for several reasons. One is that it does not look good on the bottom line. Second, every time another foreclosed home goes on the market at a substantially reduced price, it brings the value down for all homes. The major banks in the U.S. are standing in a straight line looking from side to side at each other; none of them want to be the first to step forward.
Time is not on your side when you are considering a short sale. You must act quickly and work only with a real estate expert who has successfully completed and graduated from advanced real estate education programs. Not all realtors are trained to handle this type of transaction, but you will find many realtors today claiming to be experts. What happens if you don’t use a professional? You jeopardize your chances of a successful transaction. Make sure you choose your short sale authority with caution. Real Estate Rescue Network can help. A highly skilled professional can take the weight off your shoulders and help you to make a decision that’s right for your family and your situation.
