What are the primary alternatives to foreclosure?
For owners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings.
1. Loan Modification. If you want to stay in your home, and it is your principal residence, let us assist you with an Obama Making Home Affordable Modfication. Because Marilyn knows the Obama system inside out, and understands the formula, she is able to cast your financials so you will obtain the best modification possible.
If your loan is for a rental property, the formula is completely different, depending upon your loan servicer and the investor on your loan. More and more, lenders are modifying investment property loans, but not as advantageously as owner occupied loans.
2. Short Sale. If you cannot afford a modified loan payment or the value of your property is less than the loan, a short sale may be your answer. Always make sure you analyze deficiency judgment liability before proceeding with short sale since you may be better off financially with foreclosure. [If the lender could not get a deficiency judgment after foreclosure, they may still insist on payment of some or all of the shortage at short sale.]
3. Deed in Lieu. By a Deed in Lieu of Foreclosure, you sign over title to the property to your lender, in lieu of foreclosure or short sale. The credit damage is less than with foreclosure, and can be minimized if you are not late on payments. Often lenders are not willing to accept Deeds in Lieu until the property has been listed for 90 days without an offer.
4. Other interim plans. Your lender will aso have repayment and forebearance plans that may help you out on a temporary basis, but these plans rarely present long term solutions unless the lender requires one of these plans before modification.
About Loan Modifications
What is a loan modification?
Changing the terms of a loan to prevent foreclosure. Before the Making Home Affordable Plan we did not have a loan modification template. Now we do for principal residence loans. While this template does not fit investment property loans, lenders have developed their own formulas and are increasingly more willing to modify rental property loans.
Who qualifies for a principal residence loan modification?
1. If you obtained a loan secured by your primary residence during the years 2003 to the end of 2007, you probably qualify.
2. If the value of your home is less than the loan, you probably qualify.
3. If you experienced a hardship that reduced your income, but you can now afford a reduced payment, you probably qualify.
4. If you are still living in your home and want to continue to do so, you probably qualify.
5. If you have a negatively amortizing loan, an adjustable loan or a short term interest only or fixed loan (5 years or less) that adjusts up after the initial term, you probably qualify.
6. If you have a loan that has already adjusted up and you cannot afford the new payment, you probably qualify.
7. If your loan was a refinance of your primary residence between 2004 and the end of 2007, you may qualify based on predatory lending violations.
8. If there was fraud in the loan process, you probably qualify based on predatory lending violations.
9. If you are in default on your primary residence payments, you probably qualify.
What types of modifications are available?
This depends on a variety of factors including who your lender is, your current loan terms, whether there are violations of lending laws, whether your home is worth less than the loan, the nature of any financial hardship, your housing debt to income ratio, and how much you can afford. The possibilities include lowering your interest rate, re-amortizing your loan over 40 years, fixing your interest rate, forbearing principal, deferring back payments to the back side of the loan.
How do I meet the hardship requirement for a loan modification?
You must prove a hardship that makes it impossible to continue making loan payments, but possible to make reduced payments. A hardship is the result of a circumstance beyond your control that forced you into a position where you can no longer afford loan payments. Some examples of hardship include:
a. Unemployment or loss of a primary income source
b. Inability to work due to health crisis
c. Mounting medical expenses
d. Employment relocation
e. Business failure
f. Bankruptcy
g. Death of spouse or significant other
h. Divorce or separation
i. You must move from your home
What if I am not experiencing a personal financial hardship? It’s really my loan and the value of my home that creates the hardship.
For many people these days, their loans have adjusted up so rapidly that it doesn’t make sense to pay such high loan payments for a property that has declined so much in value. For some lenders, these factors alone spell sufficient hardship to qualify for a loan modification, especially if you are in default on your loan.
What if I have assets?
Most lenders do not consider your asset-based status. They generally just look at your debt to income ratio and your ability to pay a reduced payment.
Do I have to be in default on my loan?
For principal residence loans, some lenders no longer require you to be in default on payments to consider a loan modification. However, you must pass something called 'the imminent default test' which is measured by the amount of your savings. If you have more than three times your PITIA, you will not be deemed to have passed the test and will not receive a modification.
For investment property modfications, you generally have to be 60 days late on payments.
What is the objective of a loan modification?
To modify the loan to make it a performing asset and thereby avoid foreclosure for the lender and the borrower. It is the only true win-win answer. Never before has the home owner been in such an advantageous bargaining position with their lender.
How are the new home loan terms decided?
If your servicer (you make your check out to them) and your investor (actually owns your loan) are signed up for the Making Home Affordable program, your interest rate could go down to 2%, your loan could be amortized over 40 years, there may be a principal forbearance. It all depends on your housing Debt to Income Ratio compared to your Gross Income. If we do nothing else for you, let Marilyn help you cast your financial profile so you will obtain the best possible modification. She's a wiz at this. She knows the Obama Plan probably better than Mr. Obama and has the coveted servicer guidelines for the Making Home Affordable Program.
How are the investment property loan terms decided?
Each lender follows a different format. In the beginning of the down turn, the lenders would not modify a rental property loan. However, more and more, they are. The terms are nowhere near as good as the Obama Making Home Affordable Plan. If you decide to apply for a modification, at least talk with Marilyn first. The way you present your financials is very important to getting your modification granted.
What are the chances of getting my loan principal reduced?
It is difficult to get a principal reduction unless the property is your home and your loan is an option arm or a forensic audit shows predatory lending violations. If your home is worth less than the loan, your lender may grant a principal forbearance (meaning they do not charge interest on the principal they forebear, but you still pay off that principal at the end of the loan). The Hope for Homeowners Program is still the best way to get your loan reduced to your home's value, but as of August '09 the program is still in the bordering on defunct. We can only hope that one of these days it will be the answer to upside down borrowers.
Can I get a loan modification if my credit is bad?
Loan modifications are not based on your credit like a typical refinance. Loan modification is a process to cut foreclosure loss to the lender. While you now have to meet stringent standards to obtain a new loan or refinance, loan modification standards are entirely different. The sole focus is ‘how can we modify this loan so this person can make loan payments, provide income to the bank and save the bank from losing money from foreclosure?” Your credit score is not an issue here; your ability to repay is.
What if I am in California or another state that requires lenders to modify loans before commencing foreclosure?
As of September 8, 2008 in California (and in other states that have foreclosure reform laws – Google your state and ‘foreclosure reform law’), if your loan originated between 2003 and the end of 2007 and is secured by your principal residence, before your lender can record a Notice of Default, they must offer to modify the terms of your loan. This is an ideal opportunity to modify loan terms into a loan that works for you long term. We highly suggest you engage an attorney to assist you with this process. Since this is a lender requirement, the fees the attorney will charge should be far less than a non-lender initiated modification. For instance, we charge only $995.00 for this type of modification.
What is a forensic review?
A forensic review is an attorney audit of your loan documents and the circumstances surrounding your loan(s) to determine if your lender violated lending laws when they made the loan to you. The legal terminology for this is engaging in predatory lending practices. Violations are found in a majority of primary residence refinances and many purchases originated between 2003 and the end of 2007. These violations permit the lawyer to immediately issue a violation letter to your lender which must be acknowledged in 20 days. A violation letter gives you a great leverage in negotiating a loan modification or short sale. It also gives your file priority because it goes to the legal department instead of the loss mitigation department and must be handled on an expedited basis.
Do not have this important legal service performed by anyone other than a law office. It takes legal expertise for this important service to be correctly performed, which also includes identifying lender fraud and misrepresentation which require trained legal analysis. On our Fees page, please review the list of services that must be performed in order to adequately complete a forensic loan audit. If a company you anticipate hiring does not perform all these services, you are encouraged to find another.
The Job of the Loan Modification Negotiator
The best loan modification representative is an attorney with mortgage expertise and strong negotiation skills to perform the following functions:
1. Coordinates with your lender(s) to obtain their loan modification criteria.
2. Obtains a package of financial documents from you and analyzes them to insure that you pre-qualify for loan modification.
3. If the value of your property may be less than your loan, obtains substantiation of value to submit to the lender.
4. Performs a forensic audit of all loans on your property and prepares a list of predatory lending practices your lenders have engaged in. This violation notice is served on the bank’s legal department. This document sets the stage for lender approval of your loan modification. short sale.
4. Submits the loan modification package, including any predatory lending notification, to the lender and negotiates with the lender’s legal department and loss mitigation department.
How will a loan modification my credit?
It will not affect your credit unless you have been late on payments.
When Should I begin the Loan Modification process?
As soon as you understand that you will have difficulty making your payments. You do not have to be in default on payments. The sooner we can begin the negotiations with your lender, the greater the chances of a successful loan modification.
How Long Does Loan Modfication Generally Take?
Two to three months. That’s why it is important to begin the process as soon as you know you are challenged. Having a lawyer involved in the process early on speeds up the process and gives it priority it would not otherwise receive.
Can the process be expedited if I am facing foreclosure or an auction date has been set?
If you are imminently facing foreclosure or even if an auction date has already been set, the process can be expedited. But, why wait this long and the resulting stress. Be proactive. Don’t wait until the last minute.
Why are we different from other loan modification negotiators?
When you speak with Marilyn you will know that you have a highly skilled multi-licensed professional to get you through what can be a complicated, lengthy process in the best possible way. Marilyn is a skilled real estate attorney and mediator with 28 years experience and a reputation for excellent service. With her in your corner, you will feel empowered instead of disempowered. You will understand that there is light at the end of a tunnel that is not as long as you thought.
About Short Sales
What is a short sale?
A short sale occurs when the property is sold for less than the loan amount with the cooperation of the lender. It permits more owner control over the process and less credit consequences than a foreclosure. Not all lenders will accept short sales and not all owners or all properties qualify for short sales.
What are the qualifications for a short sale?
Both your property and you have to qualify for short sale consideration.
How does the property have to qualify for a short sale?
Comparable sales must substantiate that your home is worth less than the unpaid balance of your loan. These comparables are identified in a document called a BPO, a Broker Price Opinion letter.
How do I qualify for a short sale?
1. You must prove a hardship that makes it impossible to continue making loan payments. A hardship is the result of a circumstance beyond your control that forced you into a position where you can no longer afford loan payments. Some examples of hardship include:
a. Unemployment or loss of a primary income source
b. Inability to work due to health crisis
c. Mounting medical expenses
d. Employment relocation
e. Business failure
f. Bankruptcy
g. Death of spouse or significant other
h. Divorce or separation
i. You must move from your home
What if I am not experiencing a personal financial hardship? It’s really my loan and the value of my home that creates the hardship.
For many people these days, their loans have adjusted up so rapidly that it doesn’t makes sense to pay such high loan payments for a property that has declined so much in value. For some lenders, these factors alone spell sufficient hardship to qualify for a short sale, especially if you are in default on your loan. The bottom line they look at is will we lose less if we short sale than if we foreclose.
What if I have assets?
Many lenders do not consider your asset-based status. They generally just look at your debt to income ratio. If they do consider your assets, they will probably approve the sale but require some payment from you.
Must my loan be in default?
Some lenders no longer require you to be in default on payments to consider a short sale. However, they must be convinced by your short sale negotiator that you intend to default if they do not agree to a short sale. It can be challenging to convince your lender that you will default tomorrow if you have not defaulted in the past.
What is the objective of a short sale?
There are two objective of a short sale. The first is for a buyer to make an offer to purchase your property for fair market value. This is the job of the real estate agent. The second is facilitating the short sale to insure it will be approved, presentation of a multi-part package to the lender, forgiveness of the loan amount shorted, and mitigation of the resulting liabilities to you. This is the job of your short sale facilitator.
The Real Estate Agent Job
Real estate agents are trained in the first aspect of a real estate short sale -- selling the property. They are not trained in the second phase of a short sale: legal assessment, deficiency liability analysis, evaluating tax consequences, negotiating with lenders, assembling the short sale package and scrupulously following up with your lenders until approval is received.
The Sale Facilitator Job
The short sale facilitator performs the following functions:
1. Interviews real estate agents and selects the most qualified person to handle your short sale (if you have not alreadyselected a listing agent).
2. Obtains a detailed Broker Price Opinion letter from the agent who will list the property for sale, and sets a listing price schedule that will gain your lender's approval.
3. Reviews the property’s loan to value ratio to insure that it comforts with short sale requirements.
4. Obtains a package of financial documents from you and analyzes them to insure that you pre-qualify for short sale status.
5. Monitors the listing to insure that it is proactively handled.
6. Prepares addenda to the Listing Agreement and any offers that will be accepted. This addenda is required because the transaction is a short sale, and often times the lender requires special language be incorporated in the sale documents.
7. Clears the short sale with the lender in advance to insure that lender requirements are met.
8. Performs a forensic audit of all loans on your property, if appropriate, and prepares a list of predatory lending practices your lenders have engaged in, if applicable. This violation notice is served on the bank’s legal department. This document sets the stage for lender approval of your short sale. (See the description of a forensic audit under Loan Modification, above.)
9. Submits the short sale offer to the lender and negotiates with the lender’s legal department, if a violation notice issues, and the loss mitigation department.
10. Works with the lender to release resulting liability and credit ramifications to you.
So, when we facilitate your sale we share the job and the commission with your real estate agent. Your agent lists the property for sale while we handle the short sale legal aspect of the transaction.
Do I pay more for you to Perform the Short Sale Facilitation Job?
No. Since we are taking on the job of facilitating the short sale, we share in the real estate commission. Generally, we are paid 1.5%, the listing agent is paid 2% and the selling agent receives 2.5%.
How will a short sale impact my credit?
A short sale coupled with 90 day late pays will damage your credit almost as much as a foreclosure. However, you will be able to obtain a home loan in 2 years after short sale whereas you will have to wait about 5 or more years for a foreclosure.
Will I have liability for the difference between my lender pay off on short sale and the loan amount?
There are two types of resulting liability. The first is a deficiency judgment which is a civil judgment in favor of the lender for the difference between the amount paid the lender and the amount of the loan. The other is tax liability. The lender cannot pursue both liabilities. Your short sale will result in one or the other. These liabilities are explained below.
What is my potential liability for a deficiency judgment?
Understanding deficiency liability is complicated. In California (and some other states), the lender cannot get a deficiency judgment against you following foreclosure if the loan is (1) is a purchase money loan secured by your principal residence (2) a seller financed loan, or (3) the lender has foreclosed by non-judicial means (trustee sale).
The lender's deficiency rights are determined in relation to foreclosure, not short sale. Before you decide to sell short, you should determine if your lender can get a deficiency judgment against you after foreclosure. If they cannot, it may be in your best interest to go to foreclosure because at short sale the lender is not bound by anti-deficiency laws. A lender who could not get a deficiency judgment after foreclosure could very well, and often does, require you to pay some of the shortage amount at short sale. If this happens, you may want to just let the property go at foreclosure. You just have decide if the credit reporting advantage you get with the short sale is worth the extra you are asked to pay at short sale.
Will I still owe the lender for the difference between my lender pay off on short sale and the loan amount?
This is commonly called debt relief which is considered taxable income. If your lender gets a deficiency judgment against you, there will be no tax liability because you are not relieved of the rest of the debt. If the lender does not pursue a deficiency judgment, they will issue a 1099-C to you for which you will incur a tax liability. This amount must be reported by you as income. However, the recently enacted Debt Foregiveness Act of 2007 exempts principal residence homeowners from payment of debt relief tax. There are other exemptions you may qualify for, such as the insolvency exemption. You may still have to report debt relief on your state return, however, unless yoru state has parallel exemptions available.
Many people believe that once they receive a 1099-C from their lender, they are off the hook for a deficiency judgment. This is not the case. The lender can still pursue a deficiency judgment for up to the statutory period in the state where the property is located. In California they have 4 years from non-payment if they are not the foreclosing lender. If a 1099 issues and a deficiency judgment is later obtained, the 1099 will be rescinded by the lender.
Are there other tax liabilities I need to be aware of?
Yes, you still have the other tax liabilities resulting from your sale of real property, such as capital gains. Did you buy this property at a low price and sell it at a higher price? If it is your principal residence, does the gain exceed the amount you are allowed by law ($250,000 single/$500,000 married)? If so, you will have capital gains tax. If it is not your principal residence, you will have a capital gain unless you replace the property in an exchange.
What are the benefits of a short sale as opposed to a foreclosure?
The primary benefits of a short sale are to limit and control damage in these ways:
1. The highest possible sale price is important to you since you may have tax liability for the difference between the loan and the short sale proceeds or owe this amount back to the lender in the form of a deficiency judgment. In a short sale, you take proactive steps to receive the highest possible price on the open market. In a foreclosure, the price will always be significantly less, which increases your liability.
2. If you take action so the lender does not have to foreclose, the lender will be more inclined to legally forgive the amount they are shorted instead of obtaining a deficiency judgment against you (if you fall in that category; see deficiency judgment, above).
3. Your credit will be negatively impacted for 3 to 5 years less than a foreclosure. If, however, you are not late on payments, your credit will be affected very little by short sale.
4. To be proactive and in control of your life. In a short sale, you are in charge. You hire your facilitator and the agent to list your property for sale. You decide what the list price should be and you respond to the offers that are received. You are involved when we negotiate acceptance of the offer by the lender. We work with you and the lender to minimize any resulting liability to you. You know when the time is right to move on to another home. You feel far more empowered because you are in control and have taken the best steps to minimize and control your loss.
When Should I begin the Short Sale process?
As soon as you understand that you will have difficulty making your payments. You do not have to be in default on payments. The sooner we can begin the negotiations with your lender, the greater the chances of a successful resolution at the highest possible sale price.
What does the short sale process consist of?
The short sale is a multi-step process consisting of the following:
1. Pre-qualification of your home and you.
2. Pre-qualification of the lender.
3. Hiring the real estate agent, setting the list price and a schedule of price reductions.
4. Analyzing and packaging your financials.
5. Documenting predatory lending violations by the lender.
6. Negotiating offers with the lender.
7. Negotiating post-sale liability and credit reporting with the lender.
How Long Does a Short Sale Generally Take?
It can take too long to even be reviewed by your lender before the foreclosure sale or the buyer withdraws the short sale offer. That’s why it is important to begin the process as soon as you know you are challenged. Having a lawyer involved in the process early on speeds up the process and gives it priority it would not otherwise receive. Typically a short sale is completed within one to two months from the time we have an accepted offer to submit to the lender. If the foreclosure sale is imminent, we can usually have the sale date postponed. Timing depends on how quickly we can begin negotiating with your lender. The sooner, the better.
Can the process be expedited if I am facing foreclosure or an auction date has been set?
If you are imminently facing foreclosure or even if an auction date has already been set, the process can be expedited. But, why wait this long and the resulting stress. Be proactive. Don’t wait until the last minute.
It all sounds so negative. Where are the positives?
Losing your home is high on the list of life challenges. But, it can represent an opportunity to realize that life is so much more than the temporary loss of a home that has become too expensive or is significantly upside down. Do you have family by your side? Are you healthy? Do you have a faith in something greater than yourself? Life is full of challenges. It is all up to you how you respond to them. You will be able to have a home again in two years and in the interim, take a break from house payments. Lease a house, pay a lease price and sit back and count your blessings as you save the down payment. Then, when you’re ready, scoop up a deal on your next home. Maybe this time you will be a short sale buyer yourself.
Why are we different from other short sale negotiators?
When you speak with Marilyn you will know that you have a highly skilled multi-licensed professional to get you through what can be a complicated, lengthy process in the best possible way. Marilyn is not only a skilled real estate attorney and mediator, but is also a real estate broker and developer. The real estate market is her lifeline. With her in your corner, you will feel empowered instead of disempowered. You will understand that there is light at the end of a tunnel that is not as long as you thought. And, since Marilyn does not get paid until the job is done, you will not have to come up with funds at a time when your supply is low. Marilyn also provides something no one else does, a Short Sale Certification, she believes is essential for credit restoration purposes.
What does your short sale certification consist of, and why is it so important?
When your short sale is over, you join the pool of your average short sale seller. But, if you’ve done the process with us, you will have saved yourself and your lender significant time and expense. Those who extend you credit going forward should be aware of this. Our short sale certification describes your sale results (price and timing) and lists the ways in which you minimized loss to your lender and took steps to preserve your credit standing. This certification is signed under penalty of perjury by Marilyn, the attorney who negotiated your sale, and can help to pave the way to a more positive, creditworthy future. As a licensed member of the State Bar, lenders give our certifications considered weight since we are bound by law to make full and accurate representations. We also ask your lender’s short sale negotiator to sign this certification.
The above is for educational and information purposes and does not constitute tax advice. For information about your individual situation, please consult with a licensed tax professional.
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