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If you are like millions of other families across the country, you are in need of some assistance from your lender to lower your payments because either your income has come down due to the economy, you had a loan that has reset with your short term rate expiring, or both. Because your home value has come down in the past few years, you may be upside down and cannot refinance. Your only option at this point if you want to keep your home is a loan modification.
Or maybe you have come to the realization for whatever reason; either the lender just will not give you a loan modification, you do not qualify for a loan modification or you have just come to the realization that you owe too much for your home and you will never get out of the hole that you are in and you need to sell your home. If you owe more than your home is worth and you need to sell, your only option would be a short sale, that is of course if you qualify, which most people do.
I know, I was once facing the same dilemas and it took me two years to modify my mortgage with constant running around in circles, sending and resending, and resending again the numerous documents that the lender was requesting. I, like millions of others saw a dramatic change in my income due to a combination of things like the change in the real estate market, investments that did not pan out and a couple of business ventures that did not go according to plan. Although my real estate business had always been steady, the prices had dropped so dramatically that the income I earned for selling the same amount of homes and maybe even more than usual still has had my income dropping by more than 50%. Hey, it happens, I know this first hand.
But guess what? I modified my mortgage of $1,100,000 down to a monthly principle and interest payment of just over $1,900. Think about what I am saying, I modified my mortgage of over ONE MILLION DOLLARS to a monthly mortgage principle and interest payment of LESS THAN $2,000. No kidding.
Am I an expert? Nobody can be an expert in a constantly changing field with constantly changing rules, and I certainly am not an expert. But having previously owned a company that helped hundreds of consumers with a successful track record of 76% of homeowners who came through our doors and completed their program with us, it is safe to say that I have gathered a lot of experience in this arena and I happily share it with you.
So please allow me to rephrase my question; Do I know a lot about loan modifications and short sales? Yes, more than most others, and I speak from experience.
Lender Games & Headaches
For those of you who want to keep your home, your choice would be a loan modification. But what about all the stories you have heard about lenders being a mess, unorganized and the games that they play, is it true? Yes, it is true. It is shameful and I am sad to say that in this day and age of free information, it is true that lenders play games, are incompetent and most of the time the right hand doesn't know what the left hand is doing. It is important that you know this because if you are to try and navigate the loan modification maze, you have to know what you are dealing with. If you truly want to keep your home, you have to learn as much as you can about loan modifications and many times actually guide your lender through the process. It is sometimes the blind leading the blind. You also have to be the squeaky wheel because remember, the squeaky wheel gets the grease!
See, lenders really are not that interested for the most part in granting you a loan modification. Case in point, many lenders such as Ing are downright brutal in granting loan modifications with months of playing lender games, sending and resending docs and usually short term loan modifications of 2-5 years. Yet, the moment that we as real estate agents list a property of theirs as a short sale, within days we receive contact from an Ing representative giving us documentation needed to get the process of the short sale flowing and all of their contact information. Let's not just pick on Ing though, they are just an example of what many other lenders do. Bank of America is notorious for jerking people around to no end. But there are many more who do the same so it is not just one bank.
But in a way, I don't blame them for not wanting to change the terms of the mortgage note. They made a deal with you for a payment and interest rate and now you want them to change it and they really don't have to. It usually does not make sense for them to do so for many reasons. From the lower interest rate that they now have to offer which does not make their investors happy, to the fact that most families that are granted loan modifications end up in default within 6 months and they end up having to foreclose or sell the property as a short sale anyway, so why prolong the inevitable?
Hey, I get it. But why not just be upfront if the lender just does not want to grant a loan modification? Why not just say NO instead of having us run around in circles doing the same thing over and over again? In these past several years I have seen more than any of you will ever see or want to see in terms of loan modifications. A few years ago, I founded a company called Home Resolution & Credit Services, Inc. and we helped hundreds of homeowners with some amazing loan modifications as low as 1%. We no longer take new loan modification clients and our company no longer exists. We had been featured in local media as well as national media in terms of the successes we have had in negotiating loan modifications legally. Click here to read some of these articles. We always conducted our business in good faith, always. But I am not so sure lenders held up their end of the bargain. We helped more families than almost anyone in California.
If anyone has the experience and qualifications to make the above statements, I do. I have seen it all and it is not pretty. Despite what you may think, despite what Government says and despite what lenders say, lenders would rather not grant you a loan modification. Yes, they are doing them, but they really do not want to. But what I want lenders to do is to just be honest and tell people, don't string them along. Start being honest and show some integrity, I think that people would appreciate the truth. Can I get an Amen?
So let's talk about loan modifications first, if that is the route you want to take. In addition, please know that today, Spring of 2013, loan modification conditions and statistics show more and more lenders doing loan modifications and that is good news for everyone.
However, throughout this article you will find that some of the decisions you will need to make in regards to a loan modification may have an effect on the possibility of doing a short sale down the road or taking advantage of some programs that are offered if you do a loan modification now and have to do a short sale later. In some cases, once you accept a loan modification or a trial mod (more on that later), you lose many other valuable benefits. I will do my best to stay on topic with occasional references to either throughout this story.
If you are wanting to do a loan modification, first of all don't pay anyone. Lenders and agencies do not want you paying anyone to do a loan modification for many reasons and will make it so difficult if you hire someone that it is just not worth it. In addition, in California, Senate Bill 94 passed in October of 2009 prohibiting real estate brokers and attorneys from accepting advanced fees for the purpose of a loan modification. Amazingly enough, these clowns are still accepting advanced fees illegally. DON'T get caught up in a loan modification, forensic loan audits, litigation and attorney scams that are taking your money upfront and evading the system and laws by calling these services something other then loan modifications which is what they really are doing. Read an article I wrote for DeadlineNews and RealtyTimes about this topic.
To get started with your loan modification, go to www.makinghomeaffordable.gov and click on the link Request a Modification. Click on the RMA form and 4506T-EZ form, fill it out and send it to your lender via certified mail. You can also click here to go to my "FORECLOSURE HELP" page where I have most of these forms including links to videos and podcasts on loan modifications. If you get a chance, watch my four part series, "You can Do Your Own Loan Mod" which shows you how to do it yourself on my "FORECLOSURE HELP" page. Its how I did it!
Just as an FYI, we can also help you in filling out these forms. We will not charge you to assist you in completing a loan modification application even after your loan modification is approved. If you need help filling them out or in determining if you even qualify for a loan modification or if it even makes sense to do a loan modification, contact me for a no-cost consultation at:
800-882-7896 ext. 800 direct line
Once you have completed your loan modification paperwork, you "should" get a response within 60 days. It could be a little longer, it could be sooner but count on around 60 days.
The first thing that lenders are offering if they feel that you may fit the guidelines of a loan modification is a Trial Modification of 3-5 months. Usually, the trial mod is close to what lenders think that you will qualify for and what they will offer you. I have been told by the actual lenders that the permanent mods are within 20% either way of what the trial mods were, and I have to say that my experience has been closer to 10% either way.
But before you accept that trial mod you need to know the following:
A trial mod can affect your credit. Why? Because the trial mod is a payment lower than what your normal payment is and many times your lender reports any payments less than the note payment as a late payment. So let's say that you have a $3,500 monthly payment and your trial mod payment is $2,000 and you pay on time every month your trial mod payment for 3 months. Every month that you pay less than your original monthly payment will constitute a late payment on your credit report and after 3 months you could and probably will have a 90 day late on your mortgage.
It is what is is. If you are dead-set on keeping that home, you are going to have to take that risk of accepting the trial mod. I say risk because the lender is not guaranteeing you that they will grant you a permanent loan modification even if you qualify and make all your trial mod payments on time, but it may be a risk worth taking. Remember, it is just a trial period to see if you can make the payments on time and they can further process your file to see if you qualify. Right now, more people who have trial mods get permanent mods so it may not be that big a risk, but rather a formality as without accepting a trial mod, you will not be granted a permanent mod in almost all cases.
I am just the messenger and need to point this out because if you are not sure whether it makes sense to keep your home, you may want to think about whether you want to accept that trial mod if you have never been late on a mortgage payment and are thinking of doing a short sale. You should know that in certain circumstances, you can buy immediately after doing a short sale if you were never late. If you accept a trial mod only to not get granted a permanent loan mod or not like the final terms of the loan mod, it will leave you in a situation where you can't buy right away because now you have late mortgage payments on your credit report which is a huge hit on your credit score.
Yes, you CAN buy right away after a short sale in some cases, but one of the major restrictions is that you cannot be late on your mortgage payment. There are a few more restrictions but I notate the main guideline is, "You were not late on your mortgage payments". This is important because if you are on the fence and you are thinking that if you do not get a good loan modification, you would rather sell your home and buy another home at today's value and go into a trial mod period of 3 months or more, you may not be able to buy another home for at least 1-2 years because you will more than likely have mortgage lates on your credit report.
If you have already missed several payments on your mortgage, buying a home immediately after doing a short sale is a mute point because your credit will not allow you to do so for another one to two years and your options are a little more limited, so doing a trial mod won't hurt you much more.
Recourse & Non-Recourse Loans
A non-recourse loan is a loan where if the lender forecloses on the property or you sell it as a short sale, the lender cannot come back after you for the difference and can only take the property. All states have different laws in terms of recourse and non-recourse loans but in California typically a non-recourse loan is an original loan and note on an owner occupied home, this applies to first and second loans. However, Home Equity Lines of Credit (HELOC) are recourse loans regardless of whether you used that HELOC to purchase the property so you could still be liable to pay that HELOC in a foreclosure, but not in a short sale. To determine what tax or legal consequences you may have in a foreclosure or short sale, always speak to an accountant or an attorney.
***It should be noted that in California, two new Senate Bills were introduced, SB-931 and SB-458 in 2011 which prohibit lenders from coming after a seller for the difference when agreeing to a short sale. This includes second and third lenders and even applies if you took cash out in a refinance. Basically, recourse and non-recourse laws do not apply in California when doing a short sale in almost all cases. However, these laws and protection only apply to short sales and NOT foreclsoures.
If you do not live in California, here is a spin that many people do not even know about which could be a costly mistake on your part; If you have a non-recourse loan, you could sell that home as a short sale or lose it in a foreclosure and not owe the lender a penny when all is done. However, many lenders are wise and tricky and will grant you a short term loan modification that will wipe out those benefits of non-recourse loans because once you sign a new note, you no longer have an original note and loan.
So guess what? If things do not work out, you could end up owing the lender the difference in a short sale or foreclosure because you accepted a loan modification and you no longer have the original purchase note that protected you in the event of a short sale or foreclosure, you now could be on the hook for the difference in what your home sells for and what it is owed! It's funny how that happens, huh? I can see it now in one of the lender's board meetings. It goes something like this:
"Buffy, if the client sells the home as a short sale, or loses it in foreclosure proceedings, we will lose the difference between what it is worth today, $300,000 versus what they owe on it, $600,000 and they will not have to pay the difference to us because it is a non-recourse loan. I have a plan, let's offer the sucker a loan mod for say, 2-5 years, and once they sign the new note it now becomes a recourse loan and when they lose the home, because we know it won't be worth $600,000 in 2-5 years we now have them on the hook for the difference. Brilliant! Fire up that engine on my private Lear jet and let's go to Washington and ask for a few more billion dollars and promise to do more loan modifications. By doing so, Government gives us billions of dollars, which come to think of it are the consumer's hard earned dollars, we offer more loan modifications and we have the consumers on the hook for hundreds of thousands per family. Brilliant! Buffy, we are geniuses. Can we stop by Morton's Steakhouse on the way to our private airport. Or better yet, with all the billions we are getting, let's put a Morton's Steakhouse inside our private jet!"
Ok, ok, maybe I exaggerated a little and threw in some things here and there to make it fun, but the above scenario is not too far from the truth. In many articles, I have said that lenders do not care about you but from reading what I just wrote and after thinking about it, they love you! Why wouldn't they?
See, the above scenario is one that happens everyday and consumers and families just do not know about it until its too late and they signed on the dotted line thinking all was well again. When in reality, it is a financial ticking time bomb that has been planted.
I am not trying to steer you away from a loan modification, for many of you it makes a lot of sense. I just want you to really think about the pros and cons of doing a loan modification versus doing a short sale before you commit because after you commit, you can't take things back. This article covers the pros and cons of both. If you want information on how loan modifications actually work, please read my article "The Truth About Loan Modifications", a link to that story is at the bottom of this page but I want you to first read this article and not get too distracted or stressed out with the plethora of information that I am throwing at you.
Does it Make Sense to Modify?
Loan modifications make sense for many people who are not too far upside down on their mortgage and who are being offered a long term loan modification. Unfortunately, 30-40 year fixed rate loan modifications are rare, the usual terms are 2-5 years. If you get a longer term loan modification with reasonable payments, it makes sense. I have actually negotiated 30 year loan modifications with payments as low or lower than rent. If the homeowner decided to move on, they could keep the home and rent it out and it would pay for itself over time.
Another variable that should factor into your decision of doing a loan modification versus just getting out of a property that is overpriced by doing a short sale is determining whether it makes sense to keep your home. Many families are so far under water that modifying their home is nothing more than renting your home for the next 10-15 years at a higher price than would you would pay for actually renting a similar home just to be able to say that you are a homeowner.
Let's put this into perspective. If you owe $600,000 on a property that is worth $300,000, with an average appreciation rate of 3% per year, it would take you 13.25 years just to recoup the loss and break even. That means that for the next 13.25 years, you are paying rent on your home because you are not making any money, you are barely breaking even. And probably not paying a cheap rent either. If the lender gave you a 3.5% fixed rate payment for that loan of $600,000, your payment would be approximately $2,694. Add taxes and insurance and your total payment is somewhere around $3,500 which is about $1,500 more than what you would be paying for rent on a similar home. That's an extra $90,000 in 5 years or $180,000 in 10 years of extra payment versus rent. But that's ok, right? As long as you get to say that you are a homeowner. Wrong.
You are upside down by $300,000 to begin with. What happens if you get a loan modification for 5 years? When the 5 years are up, you are still upside down by $204, 689. 10 years? You are still upside down by $87,707. You are not going to be able to refinance your home because you owe more than it is worth. You are just prolonging the inevitable just so you can say that you are a homeowner.
In contrast, if you were to sell your home and buy one immediately or within 2 years, after the 13.25 years that it would have taken you to break even on your current home, your new home would have appreciated and your loan balance would have come down to the point where you would have $269,500.45 in equity. That's a lot of money to throw away. Not much to argue on that one. Oh, and I forgot to mention that the principle and interest payment on that new home at today's value and rate of 3.5% would be $1,347 for a 30 year fixed rate loan. Add taxes and insurance and you are somewhere close to $1,800 fixed for 30 years.
In some circumstances a loan modification makes sense, in some cases it does not. If you have a moment, read an article I wrote for DeadlineNews and RealtyTimes on this very topic called "How to Wait Out Creeping Home Equity Gains".
I have an amazing formula
that shows you down to the penny how much your home is worth, how long
it will take to recoup your loss and whether you qualify for a loan
modification or short sale. Contact me for an appointment to discuss
your particular scenario and situation. You can also watch a short video on how this formula works by clicking here.
& Their Consequences
All sounds fine and dandy, but is it? That depends. Not everyone qualifies for a short sale and some short sales can have costly consequences. If it is an investment property, you could be hit with paying the difference or getting taxed on the difference minus certain write-offs and deductions that you can claim. When you sell an investment property as a short sale, the lender can come after you for the difference especially if you have other properties with plenty of equity or have other assets or high income.
Except of course, as I stated previously in this article, in California, where lenders CANNOT come after you for the difference in a short sale even if it is an investment property up to four units due to Senate Bills 931 and 458 which were put into effect in 2011. There are certain restrictions, but they are very few and almost all California homeowners doing a short sale will be able to walk away without having to owe any money to their lender even if they refinanced and took cash out. This is OBVIOUSLY great news, but only applies to short sales and NOT foreclosures.
There are cases where a lender will flat out deny a consumer a short sale because they think that the consumer has the ability to make the mortgage payment because you have to show hardship in wanting to do a short sale. You can't always just do a short sale simply because the prices in your neighborhood have come down. You will have to prove hardship by providing financial statements to the lender that shows that you no longer have the ability to pay that mortgage and are experiencing hardship because of the property. This applies to both owner occupied and investment properties.
But the good news is that being turned down for a short sale is a rarity, very rare. Very few real estate agents have done as many short sales as myself, and I cannot even remember if a lender has ever denied a short sale to one of my clients due to my clients financial status, it has been more due to a property value issue or other issue that a short sale has not been approved.
There are many laws that have come into play where homeowners can in fact sell their home as a short sale and either have limited or no liabilities whatsoever to the IRS or to the lender. There are many formulas that your CPA can use to determine if you are financially insolvent which can many times eliminate the need for you to pay taxes on the short sale of the property. Financial insolvency basically means that you have more debt than you have assets, which seems to be the case right now for most people who are looking to either do a loan modification or do a short sale.
Even if you do have some consequences in doing a short sale, many times the consequences are a lot less than keeping a home that is a monthly financial drain. As I always mention, speak to a qualified accountant or an attorney to determine what if any your consequences could be. Sometimes, for those who can no longer make their payments or in other circumstances, there is no choice. But still talk to an accountant or attorney so that you are prepared.
In a short sale, your credit will more than likely be affected. How much depends on you if you miss any payments. The credit consequences are more or less as follows; Let's use a numbers system of 1-10 with one being the best, 10 being the worst. 10 would be a bankruptcy, 9 would be a foreclosure. A short sale is somewhere around a 3 in terms of how your credit will show immediately after a short sale because usually a short sale reports to the credit agencies as settled for less than what was owed, something similar to a charge-off. If you miss a payment, the 3 becomes a 4 and keeps rising to a worse score each time you miss a payment.
Recently, many lenders have now been reporting PAID AS AGREED and/or PAID IN FULL to the borrowers credit reporting agency. This is great news for many homeowners who want to do a short sale on an upside down home but are afraid of how their credit will be affected. As I previously mentioned, this could mean that the seller can become a buyer a short time after a short sale if they do not miss any payments.
In a short sale, you can usually stay in the home while it is being sold and goes through the lengthy short sale negotiation process with the lender. Right now, I am seeing about a 90 day time frame in which it takes for the lender to respond to a short sale offer. The typical time frame from start to finish from the time that you list your home to the time it takes to sell and close is about 4-6 months, 1 month for an offer, 3 months for the lender to agree and another 1-2 months for the new buyer to obtain their financing. Of course, this all depends on your lender and investor who holds your note, but 4-6 months should be about right.
In a short sale you usually do not pay closing costs or commissions. Usually the existing lenders pay for closing costs and commissions.
If you are in foreclosure, whether you have received a Notice of Default or Notice of Trustee Sale, you can still put your home up for sale and stop the Trustee Sale while your lender reviews offers on the property. In many cases, I have seen a consumer on the verge of losing their home within days put their home on the market as a short sale and the lender stops the Trustee Sale and negotiates the short sale. This is a lot of help to the home-owner because if they were to lose their home to a Trustee Sale, they could be evicted a short time later but instead they get to stay in the home for 4-6 months while the lender reviews and approves the short sale and the new buyer closes escrow all without the home-owner having to make a payment. It is almost never too late to sell your home if you are in foreclosure unless the home is about to go to auction. Usually, 7-10 days before the auction date is the cutoff before a lender will review offers although I have seen it come down to the day before the Trustee Sale, but don't cut it too short.
Short sales are not fun, I know, I have done a lot of them for many years. In fact. I used to teach workshops and even did some instructional videos on how to handle short sales and was featured in the media more than once regarding short sales.
Years ago I told everyone that short sales were coming and were going to be huge and I used the term short sale when many people did not even know what short sale meant. Most people thought I was referring to board short sales being that I live in the Santa Cruz area.
Remember what I said about sending and resending documents to lenders for loan mods? Well the same applies to short sales as lenders are just bombarded with requests that they just can't handle the demand. It is a constant sending and resending docs and a waiting game that sometimes seems endless. Many of the lenders come back with counter-offers that are so out of touch with reality that we have to continuously perform market analysis after property analysis.
But that's ok, it is all part of the new real estate model and if you plan on being in this business for the next few years, we all have to get used to it and readjust our game plan from time to time.
Loan Mod or Short Sale? How about Foreclosure?!
Right now there seems to be a disturbing trend being put into play by lenders in which consumers are constantly being thrown the "we want to help you keep your home because you are a candidate for a loan modification" that is wreaking havoc everywhere. It goes something like this;
Many consumers who have tried for months or even a year to get a loan modification only to get ignored or denied finally decide to sell their home as a short sale because that really is their only option other then foreclosure. When the consumer is either on the verge of of accepting an offer or closing escrow on the short sale, their lender contacts them and tells them; "What are you doing, don't you know that you qualify for a loan modification?" The consumer then cancels the sale and goes through another 3-4 rounds of sending lender documentation only to get, you guessed it, ignored or denied again. It is a never-ending circle of false hope and confusion.
Why would a lender do this? Several reasons:
Many times the lender rep who is calling the consumer does not have the consumer's records or information showing that they have been denied before. You would think that in today's world of technology breakthroughs lenders would all be connected and everyone at the lending institution should have everyone's records at their fingertips, right? You would think.
Many times the right hand does not know what the left hand is doing and the lender rep is nothing more than a telemarketer or someone in the collections department who is very misinformed.
Another reason could be related to what I wrote earlier in regards to non-recourse loans. If the lender sees that your loan is a non-recourse loan, they know that if you close escrow on that short sale you will not owe them a penny and you will be able to walk away. But if they give you at the last minute an attractive loan modification for 1-2 years, once you sign the new note your loan is no longer a non-recourse loan and you could be on the hook for the difference in what the property sold for and what is owed on the home. Sneaky, huh?
To add insult to injury, many consumers are behind on their mortgages to the point that they could lose their home in foreclosure in the near future. Instead of closing escrow and avoiding foreclosure, the consumer is excited that they could get a loan modification, they cancel the sale of their property and once several months pass by with no response from the lender or a denial, they could be losing their home in a foreclosure within days with no time left to put the property on the market. Unfortunately, this is a real scenario that I have seen more times than I want to remember.
In California, new laws have come into place where lenders cannot do dual tracking, meaning they cannot work with the borrower and proceed with foreclosure actions while they are working ona loan modification or short sale. This is great news for many borrowers who were being scammed into thinking they were getting assistance while lenders were doing nothing more than keeping the property occupied while they continued with the eventual foreclosure of the home. Lenders were doing this for years and in California it is not illegal for lenders to do so.
So What Should You Do?
I am not advocating a loan modification or a short sale, only you with the right information can make the right choice. Each has its pros and cons. But what I am saying is that if your lender does not want to work with you and you owe a lot more on your home than what it is worth, stop throwing your money away and stop groveling to the lender for assistance when the only assistance that will be given will benefit the lender for many years. These are times to think smart and lean, these are not times to be throwing your money away. Paying a high cost for a property that will not give you a return for 10-15 years, or even longer, is just throwing your money away. Stop doing it and fight back. If your lender does not want to help you, sell your home, save some money and in a year or two buy a home at today's prices, today's interest rates at 30 year fixed rate loans.
The waters today are infested with sharks; the lenders, so-called foreclosure specialists and scam artists. Be careful and beware because sharks don't hug, they bite.... and it hurts!
Loan Modification Pros & Cons
- Lower your payment
- No refinance cost
- Rates as low as 2%
- Keep your home
- Loan mods are getting easier
- Short terms mods the norm, 2-5 years
- Resets of short term mods bring you back to square one as your home will still be worth less than what you owe
- Lengthy and unorganized process
- Very little lenders reducing principle
- Lose non-recourse benefits
- Lose new FHA guidelines for selling & buying home
- Get out from underneath property that you cannot afford
- Avoids foreclosure record
- Usually no costs associated, lenders usually pays closing costs and commissions
- If non-recourse loan, you do not have to pay the difference
- In California, lenders cannot come after the seller for the difference in any loan if they agree to a short sale due to California Senate Bills 931 and 458
- In certain situations, you can sell and buy another home immediately - if not, the wait is 1-2 years before you can buy after a short sale
- You can stay in the home while it is on the market and in escrow, 4-6 months
- Possible tax consequences or liabilities to lender
- Can damage credit, although not as much as foreclosure
If you would like to meet with me to see what makes sense for you, please contact me for a free no obligation consultation. I am here to help!