Many homeowners are facing financial problems resulting in an inability to pay the full amount due on their home mortgage. This problem has been greatly compounded by the dramatic fall in home prices in the last two years, reducing or eliminating any real equity in a home's value. Coupled with an extremely slow real estate market, this problem has lead to massive foreclosures, which flood the market with low priced homes, exacerbating the problem. However, option do exist for homeowners, including short sales, short loans, deed-in-lieu of foreclosure and forbearances which can help either save a home or allow for a better exit.
The first step to resolving any home loan problem is to contact your lender's loss mitigation department and discuss what options they offer. New programs are being created and not all lenders offer all programs. You also need to find out exactly what documentation a lender will require to apply for any program.
Many homeowners lose the ability to pay their mortgage due to unforeseen circumstances, such as job loss, medical problems, divorce or loss of an income producing tenant. In these circumstances, if the necessary income is expected to return, forbearance by a lender can save a home. In forbearance, the lender waives monthly payments for a fixed period, usually six months, and converts the unpaid interest into additional principal. After the forbearance period ends, the borrower must start making monthly payments, either based on the original payment amount with a balloon payment due on pay-off, or a higher amount based on a new amortization which includes the unpaid interest.
A loan modification is a more permanent solution than a loan forbearance. Essentially the lender agrees to modify one or more terms of a loan to help prevent the borrower from default. The ultimate goal of any modification is the reduction of the monthly payment to a level that the borrower can afford based on their income. Modifications can reduce interest rate, reduce principal due, convert a loan to a balloon mortgage, shifting some principal payment to the future, or lengthen the loan term. Every lender is different but for borrowers with high interest adjustable rate loans, a modification reducing interest to low fixed rate terms can be the difference between keeping and losing a home.
A short loan is a new program that allows a lender to reduce a borrower's loan based on the decline in value of the mortgaged property. A new appraisal is done and the loan balance is automatically reduced to ninety percent of the current value, with the old loan balance forgiven by the lender. This program has limited availability at present but availability is expected to expand as the crisis continues.
A deed-in-lieu of foreclosure is a traditional method for a borrower to avoid foreclosure. Since the purpose of a foreclosure is to divest the borrower and any subordinate lenders of ownership, a deed-in-lieu can be a solution to a borrower avoiding an extreme credit damaging foreclosure. The key to any deed-in-lieu is that the property has to be free and clear of any junior encumbrances, such as second mortgages, association liens, tax liens or judgments because in a deed-in-lieu, the lender takes subject to such encumbrances.
Short Sale Part I
A short sale is an agreement by a lender to accept less than the full balance due upon the sale of a mortgaged property in exchange for releasing the mortgage. Generally short sales require submission of an actual sales contract & a closing statement showing the net proceeds to the lender in order to obtain approval. This method often takes months & many homeowners have lost buyers due to the delay. Some lenders are adopting a pre-approval process that basically guarantees acceptance of a short sale if the net proceeds are greater than the pre-approved amount. When listed for sale, the listing must include that the sale is on a short sale basis, & the contract must include a short sale addendum. Otherwise, the seller will be expected to make up the difference at closing between the net proceeds available and the amount due the lender. In considering any transaction wherein the lender will receive less than the full balance due, the treatment of the difference must be addressed.
Short Sale Part II
This difference is commonly referred to as a deficiency & a lender has two options on dealing with this amount.
First, a lender can treat this sum as an unsecured debt & attempt to collect from the borrower. Many lenders sell these deficiencies to third parties at a steep discount. These "deficiency buyers" then aggressively pursue collection.
A second option is debt forgiveness. If a lender forgives your remaining deficiency debt to them, you will no longer owe the lender any money. However, debt forgiveness is a taxable event. For example, if you have a $300,000 loan & the net proceeds of a short sale equal only $200,000, & the lender forgives the debt, you will receive taxable income of $100,000. One major exception to the taxable event rule is principal residence debt forgiveness. With some exceptions, any debt used to buy or build your primary residence or any refinance of the original debt will not result in a taxable event should a lender forgive any debt
Foreclosure Part I
In some cases a foreclosure may be the only option. The foreclosure process starts with the filing of a complaint which must be served on the owner, any tenants, and on junior lien holders. Owners have twenty days to respond once served, and if no response is made, a lender can move for summary judgment with an additional twenty days notice. Once judgment is entered, a sale date will be set, usually within 35 days of the judgment. Traditionally, uncontested foreclosures took about ninety days from filing, but with the foreclosure overload, cases are now taking six months or more.
Many foreclosures are done improperly, or with procedural errors. An owner seeking to delay a foreclosure can retain a qualified lawyer who can usually delay a foreclosure action to insure that the lender acts properly. The delay allows an owner more time to either sell the property or complete one of the listed work-outs described above.
Foreclosure Part II
Depending on the issues involved a delay of twelve to eighteen months is generally possible.
A final option is bankruptcy which automatically stops any foreclosure for at least ninety days. New legislation is pending that will even allow bankruptcy court judges to modify defaulted loans to help homeowners save their homestead by lowering interest rates, reducing principal and ultimately lowering the monthly payment due to a manageable level.
The key to using the options described above is to work properly with your lender and other professionals so as to explore all options before simply giving up and facing foreclosure, or once served with foreclosure, taking appropriate steps to slow the process to ensure proper treatment. Preparing now will maximize your ability to address these issues and to avoid major losses in the future.