Stop Foreclosure
In the initial article on Atlanta Short Sale and Foreclosure Information we examined the terminology used with short sales and foreclosures along with the pre-foreclosure and foreclosure process. In this article we are going to examine potential options available to owners of distressed properties. Please understand that these options are being presented in a general context and to determine which option would best suit an individual circumstance it would be best for the homeowner to also discuss all options available with qualified finance, tax and legal professionals.
Distressed Homeowner Options
Refinance
Homeowners that are current on their mortgage may be able to take advantage of today’s lower interest rates by refinancing via the Making Home Affordable initiative launched in early 2009. The criteria to be eligible under this program are as follows:
• The Home – Must be owner occupied and be a one to four unit home
• The Existing Mortgage – Must be owned or backed by Fannie Mae or Freddie Mac and the Loan-To-Value Ratio (LTV) is above 80% but not more than 125% (If you don’t know if your loan fits into this category you can check to see at http://makinghomeaffordable.gov/loan-lookup.html)
• The Borrower – Is current on existing mortgage payments and has sufficient income to support the new mortgage payments
Sell and Bring Cash to Closing
Even though many homeowners may not have the cash to cure a deficiency at closing, they may have assets in the form of Treasury Bonds or Individual Retirement Accounts to do so. Homeowners can avoid the credit damage that a short sale or a foreclosure can cause by curing the deficiency in this manner. Before considering this option homeowners are strongly advised to consult with their financial and tax professionals to examine any negative effects.
Lender Workout
Remember the lender does not want the home. The lender, in many circumstances, will work with owners of distressed properties to help the homeowner keep their home. Let’s examine Mortgage Workout Options:
• Forbearance – If you have a reasonable plan for catching up your lender may allow you to make partial payments or skip payments. Inform your lender if you are expecting a Tax Refund, A Bonus, or perhaps a new job. Let them know what is changing that will positively impact the situation
• Reinstatement – Reinstatement refers to making a payment that covers all the late payments and is usually at the end of the forbearance period
• Repayment Plan – Perhaps you can’t afford reinstatement, your lender may allow you to pay an additional amount each month until you are caught up
• Loan Modification – Many lenders may agree to amend or modify your mortgage to avoid foreclosure. Ways that the mortgage could be modified would include:
1. Adding all the missed payments to the loan amount and increasing the loan amount to cover the increased principal
2. Increasing the number of years for you to repay the loan, lowering the interest rate or forgiving a portion of the loan to reduce your monthly payment
3. Switching an Adjustable Rate Mortgage to a Fixed Rate Mortgage helping you to avoid the fluctuations in your monthly payment
4. Establishing an escrow account for taxes and insurance with your mortgage so that you do not have those large expenditures
Earlier we discussed the Making Home Affordable Initiative for Fannie Mae and Freddie Mac owned or backed properties where the homeowner is current on the mortgage. Homeowners struggling to stay current on their mortgage who have experienced a change in income or other financial hardship may seek a loan modification via the Home Affordable Modification; which is a component of the Making Home Affordable Program. The Home Affordable Modification is a voluntary program with participation from major mortgage servicers. Let’s look at the requirements for this program:
• The Home – Must be owner occupied and is a one to four unit home
• The Existing Mortgage – The unpaid balance is less than $729,750 for one unit properties (Higher Limits are available for 2, 3 and 4 unit properties), the loan was originated before January 1, 2009 and payments exceed 31% of the borrowers gross monthly income
Under the Home Affordable Modification, once the loan has been modified there is a three month trial period. If during the trial period the borrower is successful with the modified interest level and the mortgage payment, the lender will execute an agreement that lowers the interest rate to a fixed rate for five years and caps the interest rate for the remaining life of the loan.
Please note that these lender workouts and loan modifications are not an area where I represent homeowners in an agency capacity or a client relationship. Even though they are real estate related transactions they are not a real estate transaction as defined by law. Even though I cannot represent homeowners with these options, they are viable alternatives for distressed property owners and they should be covered in this article.
Short Sale
Again, a Short Sale is defined as a situation in which the seller owes more money on the loan (and any other liens on the property) than the sale of the property will likely produce and the seller is either unable or unwilling to bring money to closing. In a short sale situation the lender has not yet foreclosed on the property and there is a window of opportunity for the homeowner to sell the property and at least partially satisfy the loan.
A short sale is considered to be preferable to a foreclosure because typically the homeowner’s credit is not damaged as severely as with a foreclosure. A short sale can also lessen the impact on the surrounding community.
There is also a portion of the Making Home Affordable Initiative that can be applied to a short sale. For borrowers that meet the eligibility requirements of the Home Affordable Modification but do not qualify for a modification Foreclosure Alternatives may be an option. Under this program borrowers and mortgage services are both provided with incentives to help prevent foreclosure. The incentives are as follows:
• $1,000 for lenders for a successful short sale or deed in lieu of foreclosure
• $1,500 for distressed homeowners to help with relocation expenses
• Up to $1,000 for junior lien holders (second mortgage or HELOC) to release liens
• 90 days up to 1 year for homeowners to market and sell the property
• No foreclosure may occur during the marketing period specified in the Short Sale Agreement
• Mortgage servicers cannot charge fees to borrowers for participating in Foreclosure Alternatives
• Mortgage servicers cannot negotiate lower commissions after an offer has been received. (This has been a problem in the past and has caused some real estate practitioners to not show short sale properties)
Deed In Lieu of Foreclosure
A deed in lieu of foreclosure occurs when the borrower agrees to trade the property to the lender in exchange for the lender cancelling the note. Market conditions have the greatest influence whether or not the lender will accept a deed in lieu of foreclosure. Typically lenders are less willing to accept a deed in lieu of foreclosure in a declining market.
Foreclosure
While foreclosure is an option, hopefully it will be the option of last resort. The previous options have been directed at ways to avoid foreclosure. In some cases foreclosure may be the best option even though it will most certainly wreck the homeowner’s credit.
Do Nothing or Walk Away
Walking away from the loan or asking the lender to proceed with a short sale simply because the value of the property went down is not a recommended option. If this is an option that a homeowner elects to pursue, it is highly recommended that the homeowner seek advice from an attorney. Often there will be additional financial consequences for homeowners that take this route.
Summary
In this article we examined and explored options that are available to owners of distressed properties. We looked at various Government Programs that are designed to assist in prevention of foreclosures. I cannot stress enough how important it is for homeowners to communicate with their lender when they are faced with this type situation.
If you reside in the Greater Atlanta Area, are in a distressed housing situation and would like a confidential meeting to discuss your options feel free to contact me. You may use the contact form on this page or you can call me at 770-318-2572.