Option 1: REINSTATE
– Repay Delinquencies to make the loan current
If you are expecting a large sum of money (e.g. tax return, special bonus, etc.) then you can pay back your delinquent amount to the bank to make your loan current.
– Special Forbearance Agreement with the bank. Also known as a “Trial Mod”.
You can request the bank to setup a special payment plan to give you time to catch up on your missed payments.
Option 2: Refinance or Modification
Refinance Loan with new Loan
If you have equity in your home you may qualify to refinance your current loan with a new bank loan.
– Loan Modification
You can apply to your existing bank to change the terms of your current loan by adjusting the rate, term, or principle balance.
Option 3: Sell Your Home (Pre-Sale or Short Sale)
If you don’t have the ability to refinance or reinstate your loan, your lender may give you time to sell your home to avoid foreclosure.
If you owe more to the bank than it is worth today then you may qualify for a Short Sale.
Option 4: Deed In Lieu of Foreclosure
Your last option to avoid foreclosure is to voluntarily give your home back to the bank by signing a Deed-In-Lieu.
Option 5: Foreclosure or Bankruptsy (last resort)
Short Sale Q&A
What is a short sale?
A Real Estate transaction in which the Lender allows a property to be sold for less than the amount owed on a mortgage and takes a loss is called a short sale. (Wikipedia)
What is the difference between a foreclosure and a short sale?
A Foreclosure has a more negative impact on a credit report. If foreclosed the Lender may pursue a larger deficiency judgment than if it is a short sale.
What are the Tax implications on a short sale or foreclosure?
Both a short sale and a foreclose can be taxable. The deficiency amount will often be considered as income for tax purposes.
For more accurate information contact the Homeowner’s Tax Professional.
Some sellers may qualify for tax relief under the Mortgage Forgiveness Debt Relief Act and Debt Cancellation program.
Can the I just sign a Deed in Lieu (DIL) and give the property back to the bank?
Requirements: The home must be listed for at least 90 days w/o any reasonable offers, it must have a clear title (no other liens like 2nd mortgages), a full financial package must be sent to the bank, and the Foreclosure Date cannot be within 30 days.
How long does it take to get a short sale closed?
Typically it takes about 60-90 days for a short sale to close. If there are 2 loans with 2 different banks involved, add another 2-3 weeks on the timing for approvals.
How is my credit affected by a short sale?
A short sale may appear as: Settled, Paid, Short Sale, or Offer and Compromise on your credit report.
Derogatory marks will typically last at least 3 years and may last longer.
Why do Short Sales take so long?
Short Sales require the Servicer/Bank to review the Homeowners financials in order to determine if the home owner has the ability to pay any or all of the debt, similar to a Buyer qualifying for a loan but in reverse.
The Servicer must also determine the value of the property and weigh that against the amount owed. They then compare what they think they would net from a foreclosure sale to the net proceeds of a Short Sale.
The amount to the Servicer is not always the determining factor. Sometimes an uncooperative Second Lien holder will cause the Sr. Lien holder to foreclose just to clear the Title.
The Lender may also have to get approval from the underlying investor; Fannie Mae or a PMI Co.
Why do Lenders foreclose?
Lenders, Servicers and Banks are corporations. These corporations are driven to make money, not to lose it. They must answer to their shareholders just like any other corporation. These corporations do not want to own property.
The only reason they foreclose is to gain control of the property or asset and recover as much of the principal loan balance, accrued interest, late fees, penalties, taxes they paid on behalf of the homeowner, court costs, and attorney fees.
In most states the laws are written so that the lender can only recover these widely accepted losses.
Can I send in a “Low Ball Offer” and have the Lender just counter?
It is not recommended due to the outstanding work load at the Servicers. Low-ball offers are usually ignored. Its best to send in a reasonable offer for the bank to consider it.
I have called the Servicer several times and cannot get a reply. Why don’t they call me back?
The negotiators are each working over 1500 files at any given time. That is why it is IMPERATIVE the servicers receive an accurate package in the beginning. Otherwise the file runs the risk of being thrown away or put on hold and then the Servicer says they never received it . If you are not getting a response from the bank and feel you have exhausted all of your options, you may request it to be escalated.
What documentation needs to be submitted for a short sale?
A complete Short Sale packet should include:
- 2 years most recent tax returns
- 2-3 most recent pay stubs (all income sources)
- 3 months recent bank statements
- Hardship Letter
- Financial Statement
- 3rd Party Authorization Letter – Estimated HUD Statement
- Property Tax Statement (optional)
- Insurance Declarations (optional) – HOA Statement (optional)
- Mortgage Stmt (to give to your agent)
- Signed Listing Agreement
- Signed and fully ratified purchase contract + buyers pre-approval letter
- Comps of nearby properties to justify the offer accepted
What is a BPO?
BPO stands for Broker Price Opinion. It’s similar to an appraisal but is less expensive for a bank to order and typically requires less information than a formal appraisal.
I have a 2nd Loan and the Junior Lien Holder won't agree to the offer from the first bank, what should we do?
Negotiating a Jr. Lien /Second Mortgage takes skill and experience to become good at it. Be sure to hire an agent or broker experienced in Short Sales. When working on a short sale that has a Jr. Lien (Second, Third Mortgage, HOA Lien, Tax Lien, Bail bond, etc) The Agent should contact the Lien holder and discuss the possibility and terms of a release. *The Jr. Lien holder will be cleared from the Title in the event of a Foreclosure and may loose the ability to collect the debt anyway. Best case would be additional cost to the Lien holder to collect after the foreclosure of the property.*
Many Second Mortgage Companies will tell you they want 10% of the outstanding debt. This is a typical response. Don’t let it shake you. Ask questions:
- “Will they accept less?”
- “Is it possible to get an exception or make allowances under certain conditions?”
Explain the situation w/ your home owner, their hardship, loss of job, medical, divorce, death in the family etc. The Negotiator needs facts & figures. Once you have established an approximate amount, have the title company prepare a prelim HUD 1 with the figures or whatever you determine is appropriate as the amount for the Release of the Lien. Get the prelim HUD 1 to the FIRST Mortgage holder as well as the Second Mortgage holder immediately. Follow up with phone calls &/or emails if the negotiator provided a direct email address. You must continue to negotiate the “gap” between the first and junion lien holders until a settlement is reached. This may require several preliminary HUD1 forms and lots of back and forth calls. This is a huge opportunity for the Agent to use & improve their negotiating skills as well as your sale skills. Don’t let your agent give up just because it sounds like the bank is standing firm on their payoff demands…if you submit a new HUD1 to the bank with revised figures they have to review it with their investors and send you a response. Just talking on the phone with a front line agent is not the best way to negotiate a short sale. You should always submit a revised HUD1 estimate and corresponding documents (signed addendums, letters, etc) on each attempt otherwise your agent could be wasting their time.
Once a settlement is reached between the First Mortgage holder and all Jr. Lien Holders the Final HUD 1 should be prepared by the Title/Escrow Co or Attorney in exact accordance with the Approval/Demand Letters from each Mortgage holder & release letters from any Jr. Lien holder (HOA Lien, Tax Lien, Bail bond, etc). The Final HUD 1 should be sent to the Mortgage holders for Final Approval & signed off as “OK to close” just prior to closing.