Wednesday, January 16, 2008

Should A Homeowner Attempt A Short Sale?

First, understand what a short sale really means.

A short sale means that you are asking the lender to accept less than their payoff in order to facilitate a sale of a home. This is done to avoid foreclosure. In this situation the home owner owes more for the home than what the home is worth. In this situation the homeowner MUST sell. Of course, if the home was worth more than is owed there wouldn't be a problem.

Homeowners, the worst mistake you can make is to bury your head in the sand, hoping the problem will go away.

First, realize that foreclosing is a rather expensive proposition for the lender. That isn't the lender's core business. They are in the business of making loans. They don't want the house back.

Before a lender approves a short sale they have to determine two things.

1. Can the owner afford to continue making payments? If, yes there is no reason for lenders to lose money.

2. If they approve the short sale will they wind up in the same position if they foreclose and then sell the property.

3. It is important to note this statement. THE SELLER MUST NOT RECEIVE ANY SALE PROCEEDS FOR THEMSELVES.

It is important to note if there a junior lien holder? If so the chance for a large discount is possible because if the property is foreclosed on the junior note holder they get nothing.

Your head head is probably full of questions. Any property owner considering a short sale should seek competent advice from an attorney and Realtor.

Short sales are relatively new arrangement and not part of a Realtor's basic training, however, there are many that have handled short sales prior to your situation. Call around and ask if they have handled short sales. It is interesting to note that lenders will pay reasonable selling commission so Realtors have an incentive to get involved.

The basic requirement for a short sale are a Listing Agreement with a Relator and a Sales Contract form a buyer which are submitted to the lender along with a Hardship Letter from property owner explaining why they cannot continue to pay the mortgage. Be sure in include documents supporting this claim. This would include tax returns and bank statements. Photos of the home and comparable home prices in the neighborhood will also help. Remember the lender could be in another state and not familiar with local conditions.

If the submitted package is complete the lender will order a Broker's Price Opinion (BPO). This is the key that will unlock the process and allow it to go forward. If that opinion is too high the lender will not accept a low offer. Your Realtor must meet with the agent doing the BPO and offer supporting information why the offer should be accepted for the amount indicated. Lenders will often accept an offer 10% lower than the BPO.

The sales contract should state clearly that the offer is contingent on the Lender accepting the purchase price in full. Also it must include that the Seller is forgiven the deficiency on the mortgage. Remember that the Seller does receive a 1099 on the forgiven part of the mortgage and that there are some provisions in the tax code for offsetting income due to insolvency.

This is probably your single largest asset. Do you really want to do a short sale on your own?? This process is jammed pack with pitfalls and should be handled by an experienced person.

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Tuesday, January 8, 2008

Adverse Remortgage - The Many Options of Adverse Remortgage

The 2 main requirements to getting a loan these days are having a steady job and a good credit rating. People who find it difficult fulfilling these 2 conditions and hence find it hard to obtain a loan, there are opportunities under certain requirements for many of these people to obtain an adverse remortgage. Typically financial institutions will analyze a person's finances to see what the causes are for them unable to obtain a loan. Under an adverse remortgage application, lenders will judge each loan application on an individual basis instead of the usual requirements for loan approval. This type of remortgage is to the borrower's advantage and often helps those who are denied regular loans.

By obtaining an adverse remortgage, the borrower avoids the time and expense of foreclosure. For example, if a homeowner bought a home with a variable rate mortgage and the rate increases significantly, the homeowner may be struggling to make the monthly installments. By having the remortgage at a lower fixed interest rate, the homeowner may be able to cope with the monthly installments and hence be able to keep his or her home.

Besides that, any equity accumulated in the home can be used to pay other past due bills or to make up the deficit on the existing home loan. By helping the borrower obtain an adverse remortgage, the lender is able to prevent a foreclosure on the property and also recoup the loan amount. The borrower on the other hand will be able to meet their monthly installments and fulfill their obligations.

Certain lenders believe that not everyone with a bad credit rating is a bad person and hence are willing to take the risk of remortgaging their home. Of course, if the homeowner is very far behind in making monthly installments and are still in debt with other loans such as credit cards, the chance of obtaining an adverse remortgage will be slimmer.

Those seeking adverse remortgage have to be aware of the fact that interest rates may be higher for those with bad credit ratings, as well as the fact that any future payment problems will result in foreclosure of the property. With these circumstances, most lenders have the assurance that homeowners will make the extra effort to remain up to date on their payments to avoid losing their property. Also, by having another chance to fix up their finances, most homeowners after some time are able to refinance their home and enjoy the interest rates reserved for people with good credit ratings.

Although it takes some time to fix a bad credit rating, adverse remortgage presents homeowners an opportunity to learn how to manage their finances better and also to keep their property while re-establishing a good credit rating with their financial institution.

Saturday, December 8, 2007

5 New Rules of Foreclosures

We all remember the heady days from late 2003-2005. It was a market where, despite the realities, just about anyone could get into the investing or purchasing of a new home without really making all the motions necessary to protect themselves from the "worst case scenario. But just like common rules of economics dictate, markets with high profitability soon will get flooded with competition. Unfortunately, millions of innocent families got swept up in the rush, either buying property that had low "teaser" rates, or just plain buying above market price, sometimes both. Lenders point fingers at their financial pools and investors, many pointed the finger at Wall Street, real estate brokers, underwriters, and homeowners alike.

It hurt the situation even more that builders were going through periods of unprecedented and unrestricted growth. I used to conduct research of active neighborhoods and could see this influx of new homes NOT followed by an increase in jobs or demand. So what did everyone do? Teaser rates they advertised, sell the loan they said. Many unqualified people bought a loan and not a house.

In the wake of the "perfect" real estate storm which will most certainly reset the credit and commercial paper industry, there are new rules emerging from the federal government that we will be playing by for some time to come, many affect the average homeowner facing tough times

  • 1. Banks will want to choose who they will work with (but only to an extent) - As many banks wake up with a mortgage hangover, they will increasingly admit to a problem with the lending practices they they once used to drive business. They have the option of restructuring the loan or letting the deed pass to their loss mitigation departments. With an overflow of work, mitigators are increasingly coming to the table with markdowns already in hand. Bottom line, the banks and investors will take the worst hit from a foreclosure market and reset market price for homes they have in their inventory. So what does this mean for you? In the end, you can get a more receptive audience to your plight, you'll just have to prove your hardship to the bank.
  • As lending gets tighter, debt consolidation will become more widely available - The best way to save your house and your credit is to prevent foreclosure. When you receive a lis pendens (Notice of Default), ACT, and don't push it to the side. You will have to deal with it eventually. Think of your future and those around you. Fortunately, experts are already becoming trained in debt consolidation, forbearance, and other types of loan modification. With an action plan in place, your debt can be reduced quicker and easier than you thought. You'll save your house, keep the black marks off your credit, and breathe a sign of relief when it's all done.
  • Banks will need to see a history - In the coming months and years, it's my prediction that banks will try to work with only those that can prove steady employment, and rental history, so keep all your records in a safe, dry and clean environment. If you have a scanner, make all the necessary files available digitally so you can send them through e-mail. A solid rental history, referrals from old landlords, and a concerted effort to stop foreclosure and work with the banks shows good history. Trust me, you'll need this one!
  • Uncle Sam will step in (eventually) - The good news about the bad news is it's become so big that the next presidential debate will focus on the issue. Take comfort for a minute that, while it's bad to be in the sinking boat, you aren't alone, and the distress signal was received. Research shows foreclosure help is on the way, especially for those who only had a temporary hardship and are behind only a few months. There are bills and committees at work right now trying to restructure the industry. The government knows now that according to the Mortgage Bankers Association, 5.12% of outstanding loans were in default in the second quarter, a rate about 17% higher than a year ago. With that kind of epidemic coming, the government knows it's time to provide regulation to an industry that basically just had 3 years of partying, only to wake up with a bad hangover.
  • Your credit will matter more now than ever - Seriously, this is a big one. If you do one thing today, figure out your credit. It literally saves you thousands of dollars to be able to qualify for lower interest loans. Everything these days is based on credit, so secure your future by getting your credit report and securing it against ID theft or foreclosure. Take the hard steps necessary now to help promise the future. You won't regret it!

Wednesday, November 28, 2007

Short Sale - 8 Common Questions

If you are a homeowner (considering doing a short sale), be sure to find a REALTOR in your area who is knowledgeable and has experience doing them. If you are a REALTOR, you should strongly consider adding short sales to your repertoire.

Here are some of the top questions clients have asked about short sales.

1. What is a Short Sale?

In the world of Real Estate, a short sale refers to the sale of real property for an amount less than the amount owed on the property. In the short sale scenario, the bank agrees to accept less than the full balance due on the debt, and usually 'forgives' all or a large portion of the difference.

2. Who benefits from the Short Sale?

Short sales are a win-win situation. Lenders, Homeowners and REALTORS all benefit from the successful short sale. Mortgagors get the majority of their money back, Homeowners get the relief they need and are able to sell their property and avoid foreclosure, and REALTORS can facilitate the transaction and receive compensation (commission) from the sale of the property.

3. Why would banks forgive the difference?

To mitigate their losses, banks can accept a settlement of less than what is owed on the property. When faced with the option of getting the property 'back' through foreclosure, a short sale often makes a much wiser business decision for the bank.

4. This sounds too good to be true!?

Not really. Things that are 'too good to be true' usually don't make good economic sense. The short sale makes good common and financial sense for the banks who grant them. The fact of the matter is, Mortgage companies and banks are NOT in the real estate business. They are in the LENDING business. The last thing they want is that property back.

5. Can FHA, Conventional or VA loans receive a short sale?

Yes! I have successfully negotiated short sales for each of these loan types.

6. What is Negative Equity?

Also known as being "upside down" negative equity is the difference between the value of an asset and the outstanding portion of the loan taken out to pay for the asset, when the latter exceeds the former. For example, if your car is worth $10,000 and you owe $15,000 on it, you would have a negative equity of $5,000. Negative equity can result from a decline in the value of an asset after it is purchased.

Even if a person owes exactly what their home is worth they would still be considered 'upside down' since there are no resulting proceeds to pay the fees associated with selling the property (REALTOR fees, taxes, title, and other seller closing costs).

7. Why does my property have negative equity? Here are a few common reasons:

  • Person bought at the height of the market and the market has now declined or they paid more than the property was worth.
  • The area has become less desirable for any number of reasons, so property values have declined.
  • Person purchased the home with little or no money down and wants to sell within a few years of purchase... and the property value has not increased during that time. Therefore, costs associated with selling the property may create a balance due at closing.
  • Person refinanced the home (with a high appraisal value) and now has little or no equity.
  • Person bought in a brand new subdivision or recently developed area that has not been fully developed or has not appreciated (or has depreciated) in value.
  • The market is soft because there is too much builder inventory (new homes) or too many existing homes on the market (resulting in a buyer's market).

8. How long does a short sale take?

Short sale approval can take 45-60 days, with some lenders taking 90 days or more. During that time, all foreclosure activity, if any is typically placed on hold.

Thursday, November 15, 2007

Foreclosure Prevention - Tips To Keep Your Home!

Behind in your mortgage payments? Afraid of foreclosure? It may not be too late to save your home from the sheriff's sale. Contacting your lender is your first step. If you're only 1 or 2 months behind, there may several different options available to you. If you're 3 or more, the options are less, but there are still ways to save your homestead.

The first thing you'll need to know is if your loan is a fixed rate mortgage or an adjustable, sometimes called a variable rate. If you have a fixed rate loan but you've had some type of unforeseen crisis; illness, layoff, death of a family member, lenders may offer you different options than people who have an adjustable rate, or ARM, loan.

There are basically 3 options that lenders can offer to help you with a defaulting mortgage.

1. Loan Modification-with this option, the lender does an 'internal' refinance of the mortgage. They create a new mortgage, with new terms, usually from an ARM loan to a fixed rate, and roll the past due payments into the new mortgage. The lender will typically ask you to pay a percentage of the past due amount up front as a show of good faith. They must be able to see that the mortgage is sustainable by you, usually by giving them a thorough budget showing some discretionary income each month, before they will entertain this option. There are many budget worksheets available online or you can call a credit & counseling service to do this. I recommend a non-profit organization, such as: Consumer Credit Counseling Services, . Your mortgage may be for a higher loan amount with your past due balance rolled in, but if the interest rate is lower and fixed, it may not require a higher payment each month like some ARMs will.

2. Forebearance-this option allows the lender to take the past due amount and defer it to the end of the loan term. Let's say you owe $3,000 in past due payments. The lender may require you to pay, perhaps, $1,000 up front as good faith, produce a sustainable budget and then they take the remaining amount and put it at the end. If your payment is $500/mo, this would equate to an extra 4 months added to your term. If you have a 30 year term and have only 21 years left, now you would have 21 years and 4 months before your loan is paid in full. ($3,000-1,000 good faith = $2,000/500 = 4 months)

3. Repayment Plan-this is the most likely option that lenders offer if you show that you can support it. The lender takes the total amount due in late payments, sometimes late fees as well, and after you pay a good faith amount, they spread the remaining amount over a specific number of months to get you caught up. For example: you owe $3,000 but your budget shows you have $600/mo in discretionary income each month. The lender may want half of that discretionary income added to your regular payment over the course of the next 6 months. ($3,000 -1,200 good faith = $1,800 / 300 = 6 months.) If your normal house payment was $500, now it will be $800 for the next 6 months, then it will drop back to the normal amount of $500/mo. Frequently people agree to terms that are not manageable and they will then 'break' the plan. Once the plan is broken, the lender is less willing to create a new one. Make sure that if you agree to a plan, that it is one that actually can work for you, based on your budget. Giving the lender an unrealistic budget will create an unrealistic plan, one which you won't be able to meet and then you'll find yourself in an even worse situation.

4. Bankruptcy-filing for bankruptcy will stop foreclosure immediately. Bankruptcy laws have changed in the last few years so you should seek advice form a bankruptcy attorney before deciding on this option and should most likely be used only as a last resort.

Lenders don't want your house. They want their money. If you contact them early during your crisis, they will be more willing to help you keep your house. If you create a budget and discover that the new job simply doesn't pay enough or your spouse's injuries won't allow him/her to return to work for longer than expected, you have no savings and no family support, you may have to face other, more drastic measures.

1. Short sale- contact your lender and tell them that you have decided that you need to sell your house but that your neighborhood doesn't support your ideal sales price, maybe not even enough to pay off what you owe. The lender will usually order an appraisal to determine what your house should be worth in your area. They then may agree to accept the price that the appraiser indicates as its worth, which may be far less than what you owe them. Then if you get a buyer for that price, your mortgage company will accept it. If the price is much lower than what you owe, you should be prepared for a 1099 at the end of the year showing the difference between what you owed and what you sold for as income. Please see your tax advisor to discuss this possibility. Your credit report will be spared a foreclosure and will most likely show "settled for less than owed" type comment.

2. Deed-in-lieu-of-foreclosure- if you decide that there is no other option available to you, you may offer the lender a deed-in-lieu-of-foreclosure. You would sign over the deed to your house to the lender. Now your lender owns your house. This saves the lender the time and expense of foreclosing on you and they know that you plan to leave. They also know that they won't have to evict you, which can also be expensive. Some lenders have a program called 'cash for keys' as well where they pay you a small percentage to live in the house until shortly before the foreclosure auction or sale and maintain the house so the new buyer doesn't have excessive repairs to make. This cash is for your moving expenses, rent and or security for a new place to live. For this, you agree to keep the house 'broom-clean' when you leave. The lender does this so you have less incentive to destroy the house which may create a hardship for the lender to re-sell it.

3. Foreclosure- this is the last option, where the lender sends you a foreclosure notice and and eviction date. Each state has a different timeline for foreclosure and you should check in your state for the average time. Some states allow foreclosure very quickly, in as little as 3 months, you could be out of your house. Others take as long as 12-15 months to actually foreclose and evict. If you have decided that there are no other options available to you, start saving your money for the move but STAY in the house until you are forced to leave. There are almost NO lenders that will evict you during the winter months if you have no where to go. They would rather have you stay in the house with heat on and water running than have an empty house that the pipes could burst in before they're ready to sell it. Yes, they don't care as much about you as they do about the house at this point, so their generosity is not about you being out in the cold as the house having maintenance issues as a result of the cold weather and being in the off-season for selling it. So don't abandon the house just because you have decided there's no way to save it. Start making plans as to where you can go when the inevitable happens but stay there and save as much money as you can before that occurs. Be cooperative with your lender, it may buy you more time as well.

There are other options not outlined here such as: lease with option, renting the house for most of the payment if you can keep up with the rest so you can have it back when finances allow, taking in a roommate, or renting an extra room out, taking on a part time job, etc. to make ends meet. Check with your local resources, such as the Salvation Army, Red Cross, Angel Food Ministries, etc. to get help with utilities, food items, if your situation is temporary and to free up some funds for the mortgage until things stabilize. Check the Internet for assistance in your neighborhood or state initiatives. Ohio, for example has some of the best, including rescue loans, rescue funds, budgeting help, and more. Contact a non-profit counseling service for help also, such as 1-800-995-HOPE. While they don't have funds available, they can go through your budget and offer assistance in many ways.

Whatever you decide, there are ways to make the situation better, more acceptable and possibly save your house from foreclosure.