Knowing Your Options

When you are facing the threat of losing your home, sometimes your choices can seem limited.  The following is a brief description of your options when you are upside down on your loan or in a situation where foreclosure is a possibility.

Loan Modification

There are several loan modifications programs available including FHA, HOEPA, and Hope for Homeowners.  Loan modifications can take many forms and may include reduction of interest, reduction of principal, forbearance (no or reduced payment for a short period of time) or other methods, depending on the lender, your income and your situation.  The success of loan modifications so far is not great and unfortunately they have a high default rate--meaning that once they are in place a large portion of them default within a short period of time.  Programs being proposed by the new administration may help this.  In order to do a loan modification, the lender will want to know your current financial information and you need to be employed or have an income source (family members, alimony, child  support, rental or other income).  If you have a subprime loan, an interest only loan that triggers to a high payment, an option ARM, or if you believe there might have been fraud or undue influence used when you originally obtained your loan, you should have your current documents carefully reviewed before completing a loan modification.  You may have some claims, like predatory lending, against the original lender and/or broker. When selecting your loan modification agent, make sure they will provide you with a reporting system that will allow you to see what work has been done on your loan and never agree to pay an upfront fee.  Also, please see Making Home Affordable, below.  

Refinance 

This is generally an option only if you have some equity in your home and credit is acceptable.  Under the Making Home Affordable program (see below), you may have the option to refinance up to 105% of your home.

Short Sale

This is typically an option when you are upside down (owe more than the home is worth) or are facing foreclosure.  You do not need to be employed or have an income source.  A short sale is a real estate transaction where the proceeds from the sale of the home are not enough to pay off the amount owed.  The lender agrees to accept less than the total amount owed and therefore must approve the sale.  It is important to use an agent that is a short sale expert as there are significant tax and legal implications involved in a short sale. An attorney should review your release of lien (issued by the lender so that you can complete the short sale) to adequately advise you if you will continue to have any liability (still owe money) after the short sale is complete.  As a general rule you will likely not have liability for the first mortgage after the close of a short sale. You may, depending on many variables, have some exposure on a second mortgage or equity line after a short sale. Unlike certain foreclosure proceedings, a well negotiated short sale can eliminate or significantly reduce your personal liability for the second lender/equity lien holders.   Under current guideline, the credit impact, especially if you want a home loan in the future, are more significant under a foreclosure than a short sale.

Bankruptcy Chapter 7

The Chapter 7 bankruptcy is a liquidation bankruptcy--sometimes called a straight bankruptcy.  It does not require that you have an income source.  The bankruptcy filing stays, or stops, the foreclosure or other sale of the property for a limited period of time.   At some point during the bankruptcy the lender will receive permission from the court to continue with the foreclosure in the form of a Motion for Relief of Stay.  A Chapter 7 bankruptcy does not permanently stop the foreclosure.  Bankruptcy filing requires that you complete an approved credit counseling class.  The filing of any type of bankruptcy will have a significant negative impact on your credit.  There are income eligibility limits based on where you reside for a Chapter 7 bankruptcy but again, you do not need to have an income source to file this type of bankruptcy.

Bankruptcy Chapter 13

The Chapter 13 bankruptcy is a debt repayment bankruptcy.  You need an income source (employment or other income) to file for this type of bankruptcy.  It stops a foreclosure until a court approves a plan to repay the delinquent amount and other debts.  You may be able to keep your home in this filing, if the you can make the current payment or a modified, negotiated payment.  There is some possibility of removing or reducing second mortgages through a process called lien stripping (if you are upside down).  Generally, under a Chapter 13 filing, the homeowner has 3-5 years to repay agreed upon debts by making agreed upon payments for that period of time.   Any amounts outstanding after that time (assuming you made the agreed payments) are wiped away.  Bankruptcy filings significantly and negatively impact your credit.

Making Home Affordable

Refinance Program. The refinance program is for Freddie or Fannie owned loans only.  You can contact your servicer (whomever you send your mortgage payment to each month) to find out if you have a Freddie of Fannie loan.  If so, refinance may be available up to 105% of your home's value. Borrowers have until 2010 to apply. 

Modification Program (under Making Home Affordable Program). Overly simplified, the lender agrees to reduce your monthly loan (including principal, interest, taxes and insurance) to a payment that is as low as 38% of your gross monthly income (38% debt to income ratio).  The lender is then paid $1,000 per loan modified.  If the lender agrees to further reduce the loan payment to a ratio of as low as 31%, then the lender is reimbursed by the program for up to 1/2 of the cost (of reducing from 38 to 31%).  The modification is for up to 5 years or until the loan is paid off.  The borrower is paid up to $1,000 in principal forgiveness each year that they are current in the program, up to 5 years.  The lender is paid up to $1,000 per year for up to 3 years for the borrower's continued success. 

The payment is reduced to a target of 38% of your gross monthly income by modifying the loan in the following manner.  First, an interest rate reduction (with a floor/limit interest rate of 2%) during those 5 years.  If that doesn't reduce your payment to get you in that 38% window, then they can extend the term to 40 years.  If that doesn't get you to the target, the lender can forebear principal (means you don't pay interest on it and you do not owe it until the loan is matured or you sell the property.  Its not forgiving the principal, its forebearing it until a later time).

To be eligible, your loan balance can not be greater than $729,750 for a single family residence, the home MUST be your primary residence and you must live there.  Borrowers must provide access to their most recent tax returns and two most recent pay stubs and must sign an affidavit of hardship based on a change in the borrowers circumstances (loss of income, high interest rate loan, etc).  The program is only available for loans made before 1/1/2009.

Check out a blog article for more info:   My Blog

Check out the official modification guidelines for the Making Homes Affordable: Treasury Guidelines Modifications or check out fannies website for Making Homes Affordable at efanniemae.com.

If you would like to evaluate your specific situation and help you determine the best option for you, please call or email us.  We understand that you are already struggling, so our consultation is free, confidential and is without any pressure.  

Avoiding Scams /Warning Signs

    Companies that ask you to transfer title:  You should not have to transfer title to your property to stop foreclosure or to complete a short sale.  This is not necessary and may indicate a scam or someone seeking to take advantage of the already troubled homeowner.

    Companies that ask for an upfront fee for a short sale:   You should not have to pay an upfront fee for a short sale.  A real estate agent that is a short sale specialist should never ask you for an upfront fee.