So, your house is in foreclosure... now what?!? Try to look at the situation without attaching your emotions. if viewing the situation from a strictly business viewpoint, you can more successfully analyze which option might best stilt your needs and desires and move you towards resolving your financial difficulty. One very important thing to remember: Time is of the essence, so sit and take serious thought of your situation and take quick action in order to allow yourself enough time to complete the chosen process.
Nine options when facing Foreclosure
1. Do Nothing - If a homeowner does nothing, they most likely will lose their home at foreclosure auction. Loan applications generally ask if the applicant has ever been foreclosed upon. Credit reports also disclose this damaging information. Not the best option.
2. Payoff/Refinance - Completely paying off the entire loan amount plus any default amount and fees. Usually this is accomplished through a refinance of the debt. New debt is at a normally higher interest rate and there may be a prepayment penalty because of the recent default. With this option, there should be equity in the home.
3. Reinstatement - Paying the entire default amount plus interest, attorney fees, late fees, taxes, missed payments and fees.
4. Loan Modification - Utilizing the existing mortgage company to refinance the debt or extend the terms of the loan. This may allow the homeowner to catch up at a more affordable level. To qualify, you must prove to the lender you have fixed the problem that caused the late payment.
5. Forbearance - Lender may be able to arrange a repayment plan based on the homeowner’s financial situation. The lender may even be able to provide a temporary payment reduction or suspension of payments. Information will be required from the lender to show that you are able to meet the new payment plan requirements.
6. Partial Claim - a loan from the lender for a 2nd loan to include back payments, costs and fees.
7. Deed in Lieu of Foreclosure - Give the property back to the bank instead of the bank foreclosing. Banks generally require the home be well maintained, all mortgage payment and taxes must be current. Most loan applications ask if this has ever happened.
8. Bankruptcy - This option can liquidate debt and/or allow more time. I can refer you to a qualified bankruptcy attorney.
--Chapter 7 (Liquidation) To completely settle personal debt.
--Chapter 13 (Wage Earner Plan) Payments are made toward a plan to pay off debts in 3-5 years. --Chapter 11 (Business Reorganization) A business debt solution.
9. Sale - If the property has equity (money left over after all loans and monetary encumbrances are paid). The homeowner may sell the home without lender approval through a conventional home sale. In this case, the homeowner will get cash from the sale. On the other hand, a Short Sale, also known as a pre-foreclosure sale, can be negotiated with your lender by your Real Estate Professional if what is owed is MORE than the property's value.
Loan Modification effected by utilizing the existing mortgage company to refinance the debt or extend the terms of the loan. This may allow the homeowner to catch up at a more affordable level. To qualify, you must prove to the lender you have fixed the problem that caused the late payment. Also, requires “forbearance”
Forbearance - Lender may be able to arrange a repayment plan based on the homeowner’s financial situation. The lender may even be able to provide a temporary payment reduction or suspension of payments. Information will be required from the lender to show that you are able to meet the new payment plan requirements.
The “Hardship Letter” is part of forbearance. Check out the hardship letter section for more detailed explanation and samples. Or, give us a call to review your financial position so that we may be able to assist you.
Remember to state the following items in your HANDWRITTEN hardship letter:
Hardships - What are your hardships (current and past). For example -unemployed, car accident, medical problems (personal or family), etc. Go into a little detail about each hardship. The following are the most important messages to get across to the Lender:
a. Why you will not be able to be current again on your loan.
b. We do not have enough income to make these payments.
c. We are leaving the property.
2. Your Assets - Explain that you have no assets with which to continue paying.
3. Any signed exemptions of documents - If you do not have bank statements, pay stubs or tax returns, you will need to explain the reason in more detail in your letter as to "why" you can not provide those documents. (i.e. I've been unemployed for 6 months and have not been able to find work) Note- realize that if you don't have tax returns, then the bank will ask for Extension-Fillings. So, if you don't have Extension-Fillings either, explain why in this letter. (i.e. "I haven’t worked in over 2 years and so I haven't filed taxes nor extensions", or "I haven't filed my tax returns for the past 2 years and I failed to file extensions as well).
4. Bankruptcy - You could also mention "1 don't want to have to file bankruptcy".
Sample Hardship Letter
["Remember, YOU must handwrite your own Hardship Letter to the Lender(s)]
To Whom It May Concern:
I have been unable to make my payments on my house, and 1 am now facing foreclosure. My inability to keep up with the monthly payments is the result of (loss of job, illness, accident, death or disability of a wage earner - describe in detail what your hardship is) In spite of my current financial difficulties, I expect that it will only get (better / worse). I am not in a position to continue making my mortgage payments. This was not at all what I intended but I have come to the conclusion that this is my only option.
Your help and consideration in this matter are very much appreciated.
Your home will be shown to both investors and traditional buyers. During this process, your process may be shown several times a day in some cases. The goal is to get the highest and best offer in the shortest time possible. Those viewing or calling to view your home have been instructed not to bother you with questions so as to not put any additional stress on you.
The First Offer:
Once an offer is received on your property, I will schedule an appointment for you to come in and sign the Purchase Contract/Agreement (this should take 5 minutes). Although you do need to sign one offer, your property can attract multiple offers. All offers will be submitted to the lender(s) for their review and you will not need to sign each and every offer that we receive. The final offer which is approved by the lender will need your signature approving of the sales price.
The Process:
Once we have sent the offer to the lender(s), the actual Short Sale process can take anywhere from 3 weeks to 4 months. This timeline varies with each lender. To keep you informed, we have developed a system which will enable you to get updates from us on a regular basis without actually having to call. First, you will be able to get an update online by going to www.Senvesco.com and click on your property address. The website is updated every Friday by 5pm. Due to the high volume of calls
from prospects, clients, agents, escrow offices and lenders, it is near impossible for us to respond to all calls on the same day. In many cases we are not able to return many calls, since we are spending most of our time negotiating a successful transaction with your lender(s).
***Please let us know should any changes or unexpected events come up on your end.
After the lender has reviewed the Short Sale package, an appraisal or BPO (Broker Price Opinion) will be ordered by the lender. A BPO is similar to an appraisal and once the lender receives the report, they will usually make a final decision on accepting or declining the sale shortly thereafter.
The lender orders the BPO so they can figure out what their net proceeds will be (how much of a loss they will be writing off). Your property will remain 'Active' on the MLS until the lender accepts the offer. Please be patient throughout this process. At times you may feel things are going too slow, but remember this is not a regular transaction and can take longer to complete.-
The Accepted Offer:
Once an offer has been approved by the lender, I will notify you that we are going to proceed to close the transaction. The lender will usually set a close of escrow date within 30 days of the approval date. If the buyer does not qualify for their loan or can not close by the lender's deadline, the next highest offer will be asked to increase their offer and in their offer will then be submitted to the lender for approval. This may allow another 30 days to close if the back up offer is accepted. Be aware that if the buyer(s) can not perform and close on time, the lender may decide to proceed with foreclosure and may not always accept the back up offer or allow a back up offer to be considered.
The Close of Escrow:
You, as the seller, will be instructed to sign seller documents prior to the closing of the file. If you are signing at the closing agent's office, please bring with you all keys, garage door openers, and a good attitude.
Your Financial Freedom:
Keep all of your copies of the documents pertaining to this sale in a safe place. Call us with your new forwarding address so we can keep in touch with you through the year and offer you assistance in preparing yourself for future success. Do not incur any new debt and try to keep low balances on any credit cards you have. Maintain good consumer credit by not paying late on your currently active accounts. Pay your rent by check or some other way that can be tracked to show evidence that you are paying on time. This will help you should you choose to purchase a new property in the future.
We hope this information helps you to keep stress at a minimum during this process and as you prepare for the future. We understand that coming to this decision may have been very difficult. With that in mind, I just want to remind you that the whole purpose of this transaction is to position you, or you and your family, for a healthier financial future, one which allows security and freedom.
Looking forward to working with you toward a successful transaction!
Offer is submitted to short sale lender after being negotiated with seller. Included in the offer are:
a. Purchase agreement
b. Pre-approval letter
c. Proof of funds to close (if applicable)
No offer shall be considered complete without the three items listed above.
2. Buyer can wait until acceptance by lender is received to proceed with their appraisal and home inspection. Contingencies will need to be released 10 days after acceptance.
3. Lender will accept or decline offer verbally with agent. This process can take anywhere from 5 to 30 business days. The lender WILL NOT COUNTER. The offer is either accepted or declined.
4. If offer is accepted, lender will send an acceptance letter based on agreed terms and set a close of escrow date. The terms usually cannot be altered after the fact and most transactions are as-is.
5. Buyer is to release contingencies within 10 days after acceptance and escrow is to close as soon as possible after acceptance or by close of escrow date set forth by lender.
6. If the agreed upon close of escrow date is late due to any fault of buyer, a fee set by the lender will be accessed.
7. If offer is declined, buyer can re-submit a higher offer for consideration. This process should take considerably less time, usually within 5 to 10 business days.
8. This entire process can take up to 60 days or longer. Patience and cooperation from all parties can make the process considerably shorter.
Above statements/conditions are acknowledged by undersigned:
If you haven't heard this line yet, you will. These are the words that you will
hear most of the time from a low level loss mitigator (you know, the mitigators
that get paid a salary and don't care how many files get approved) who is just
going off of `guidelines'. They are usually the mitigators who can only submit
for approval a loss severity to a certain level (for example, 20% loss on a first
position lien, see below for examples and scenarios).
In some cases the mitigator will tell you the offer is too low without ever
opening the file. They do this to see if you will scramble and get the offer increased. However, sometimes you will hear this because the offer really is too low and the mitigator knows they will get more at auction or selling it through the REO department.
Now that you know what they are going to say, let's work on how to deal with it.
When you are told you offer is not high enough and you KNOW that it is not
because it is a low offer, but in reality it is the best offer for the current market,
then you can be pretty confident in knowing that you are dealing with someone
who can not sign off on the loss severity of the loan in question.
What is loss severity? First, to make the explanation simple, let's use an easy
scenario. If I loan you $100 and you can only pay me back $70, that would make
my loss severity $30 or 30% of the original loan amount, if I agree to settle for
$70.
Example:
If you have a loan for $200,000 on a home and your offer, after all costs, will net the lender $160,000, the loss severity would be $40,000 or 20% of the original loan amount.
Why is it important to know how to figure the lender's loss severity? If you can
figure out the loss severity on a short sale before submitting an offer, you are
going to be ready when you hear, "We won't accept that offer. It is too low."
Below, on this page, is a chart showing 'acceptable loss severities' when you are
dealing with a top ten lender (which will be the case with over 80% of your files).
In cases where the loss severity is greater than that shown below, you will most likely hear the dreaded "the offer is too low" statement.
This is not a time to get frustrated or give tip. Just know that you need to escalate
Acceptable Loss Severity
Example
First position lien -20% $80K of $ 1OOK
Second position lien -95%-99% $1 K-5K of $ 1OOK
Second position HELOC -80% $20K of $ 1OOK
Let's work these numbers with a scenario. In this scenario, you have a property that was purchased 2 years ago for $500,000 using 100% financing with just one loan for $500,000. The current market value based off of recent sold comparables is $400,000. On this property, let's say we get an offer for $380,000 which, after closing costs, back taxes, HOA and commissions will leave a net amount to the lender of $346,500. So, if we look at our loss severity, we will notice that it is 30.7% (346,500 / 500,000 = 0.693 [69.3% of the original $500,000] which equates to a loss severity of 30.7% or $153,500)
In this case, if you are dealing with a low level mitigator, you will probably need to escalate. Here's the reason why:
The file just doesn't fit the standard loss severity guidelines and the mitigator may not be able to sign off on the loss and will take too long to get approval or doesn't even know that he/she can get approval on the amount of loss.
We hear complaints from agent's about how "the bank is stupid for not accepting
a offer" more than any other complaint. Your job is to find and talk to the right
person at the bank who understands that loss severities are just a general guideline and that the ultimate job of a loss mitigator is to limit loss to the bank. In essence a good (read: higher level) loss mitigator snakes decisions by first determining if accepting the offer presented will net the bank more than any other alternative (deficiency judgment, collections, sale at foreclosure auction or sale through the REO department).
If you can present the offer as "very close to current market value" (by way of influencing the BPO, recent comps, cost of repair, etc) and make it obvious that the offer will give the bank a better return vs. foreclosure or REO sale, then you will get an approval on the file that may have been previously 'denied' by the lower level mitigator.
For the final scenario, let's look at how to deal with HUGE loss severities when you have a property with a first lien and a second which is a HELOC. Assume the property was refinanced at the top of the market with a $300,000 first loan and a $50,000 HELOC. Today, the value is at $245,000 and we have an offer at $240,000 which will have a net available after costs and commissions of $220,000. In this case we are dealing with a HELOC. You know that they will expect a little more than a trite/traditional second lien. Our job is to explain to the first lender, who already is losing almost 30%, that they need to allow
$10,000 of the $220,000 to go to the HELOC. They will probably say no and
laugh. Let's say we get them to allow 10%, or S5,000 to the HELOC and the
1st-HELOC has agreed to a $5,000 unsecured note from the seller/borrower. In this
case, the HELOC will show $10,000, a 20% recovery or 80% loss severity.
The first lender will show a recovery of $215,000 or 71.6% and a 28.4% loss
severity.
So, to summarize, make sure that the offer is within 10% of true, current
market value. If it is, the loss severity really doesn't matter, as long as you can prove the fair market value. In most cases, with high loss severity, we will need to deal with a senior loss mitigator.
Before deciding whether a short sale or loan modification is needed, you may want to have answers to some of the following
Q: Will there be any tax consequences to doing a Short Sale?
Q: Can the bank give the 1099-C & report my credit as paid less than agreed?
Q: Can the bank seek a `deficiency judgment' for the amount they lose by accepting a Short Sale?
Q: Why Should I do a short sale? If I am going to have to move anyway, why shouldn't I just allow the bank to foreclose so I can stay in the house rent free for longer?
A: The main benefit of a short sale is that in many instances you can still stay in your home rent free just as long as if the house were to go to foreclosure and you will still be able to show your mortgages as `paid in full' vs. `foreclosure'. The amount of loss to the bank is usually less in a short sale, thus the amount of the 1099 to the homeowner in a short sale is less. You will also want to have an expert on your side dealing with the lender. If you allow your home to go to foreclosure, there is no one there to help you clean up the mess and pick up the pieces as you struggle with bad credit for the next several years.
