Knowing Your Options

When you are facing the threat of losing your home or investment property, 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.   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 advisor, 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. 

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) and other newly proposed programs, you may have the option to refinance up to 105% to 125% of your home (must be a federal insured/owned loan).

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. Based on laws that became effective in July of 2011, if you complete a successful short sale, you will not have continuing liabilty for the loans on your home (you may have tax consequences, so consult your tax advisor).  Unlike certain foreclosure proceedings or "just walking away" from your home, a well negotiated short sale can eliminate your personal liability for the second lender/equity lien holders.   Under current guidelines, the credit impact, especially if you want a home loan in the future, are more significant under a foreclosure than a short sale.  Please note that due to federal legislation expiring at the end of 2012, you may face additional tax consequences for a short sale. Please see the 12/9/11 post by clicking on my blog at the top of the page.

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.  If you would like a reference for a bankruptcy attorney, we can provide some trusted resources.

HAFA Program (under Making Home Affordable Program)  Eligible borrowers may qualify for relocation expenses under the program.  For more details see http://makinghomeaffordable.gov/hafa.html 

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.