Avoid Foreclosure 

What is a loan modification?

A Loan Modification is a permanent change in one or more of the terms of a borrower’s loan, allows the loan to be reinstated, and results in a payment the mortgagor can afford.

Do I qualify for a loan modification under the Obama Homeowner Affordability & Stability Plan?

To be eligible you must be the owner occupant of a one to four unit home (i.e. investment and vacation properties are not eligible), the principal balance on your mortgage must be equal to or less than $729,750, your mortgage payment (including taxes, insurance, and association dues) is more than 31% of your gross (pre-tax) monthly income, and you can no longer afford your mortgage payment due to a significant change in your income or expenses.  To qualify for a loan modification, your loan does NOT need to be owned or securitized by Fannie Mae or Freddie Mac.

To learn more about the Obama Homeowner Affordability & Stability Plan, please click on the following link. 

http://www.makinghomeaffordable.gov/

If you have already missed one or more mortgage payments and have not yet spoken to your servicer, call them immediately!  You will find their phone number on your mortgage statement.

What is a short sale?

A short sale is when the net proceeds from the sale of a home are not enough to cover the sellers' mortgage obligations and closing costs.  Upon sale, the seller receives no proceeds.  This type of sale is sometimes called a "short equity" transaction, because the seller has no equity, or negative equity in the home.

How do I know if the sale of my home will be "short"

A market analysis is the first step.  Your realtor will then compare the estimated market value with the seller's mortgage obligations plus closing costs.  If the market value is less than the mortgage obligations plus closing costs, then the sale will be a short equity transaction.

If I owe more on my home than its current market value, what should I do before I sell it on a short sale?

You should contact your lender and see if they will work with you on a "loan modification" or "restructuring" your loan.  Loans that have been sold to Fannie Mae or Freddie Mac are eligible for loan modification under the Obama homeowner stability plan.  Lenders may reduce the principal, or change your interest rate.  This is sometimes called a "workout" with your lender. 

Why should I consider selling my home on a short sale?

You will only want to consider selling your home on a short sale if your lender(s) will not work on a loan modification with you, and you are in default, or will start defaulting on your payments.  Selling on a short sale requires a lot of time and patience.  Depending upon your entire financial situation, selling on a short sale can be better for your credit history and your ability to qualify for a mortgage down the road than having a foreclosure on your record.

How long does it take for a lender to approve a short sale?

Approval times vary by lender and the volume of short sales that they have.  We have seen some short sales approved in as little as 3 weeks, and others that have taken as long as 4 months.  TO SELL A HOME ON A SHORT SALE YOU NEED PATIENCE!

Once a purchase agreement is submitted, what is the process to obtain the lender's approval?

You will need to give your lenders a signed authorization allowing your realtor to act/negotiate on your behalf.  Your realtor will be in contact with the loss/mitigation department of your lender(s).  The contact person at the lender is called a "negotiator".  If there are 2 or more mortgages on the home, there will be 2 or more negotiators.  Your realtor will act as the liaison between all of the negotiators, and will help facilitate which company gets how much of the net proceeds of any offer.  Once the negotiations are complete, all lenders will submit an approval letter so that transaction can close.

If the lender approves the short sale, will I be responsible for any portion of the difference?

Depending upon the difference between your mortgage obligations and the net proceeds of any offer, the lender may attempt to pursue collecting debt from you.  They may attempt to ask you to sign a new promissory note for the difference.  2nd or "junior" lien holders are sometimes known to agree to the short sale payoff, release their lien so the property can be sold, but then sell the bad debt off to a collection agency.  The collection agency may then attempt to collect the debt from you.  We have no way of knowing what your lenders(s) may ask of you, until we submit an offer and go through the process.  Lenders are also required by the IRS to issue 1099's (misc. income). 

Will I have to pay income taxes on the difference?

In years past, a homeowner was required to pay income taxes on the difference between the net proceeds of the sale and their mortgage obligations.  In 2007, The Mortgage Forgiveness Debt Relief Act was implemented.  This Act allows the mortgage debt from a short sale or loan restructuring to qualify for a tax exclusion.  This exclusion does not apply to all forgiven or cancelled debts.  The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes.  Debt used to refinance your home qualifies for the exclusion, but only up to the extent that the principal of the old mortgage, immediately before the refinancing, would have qualified.  YOU WILL STILL RECEIVE A 1099 FORM FROM YOUR LENDER(S).  IT WILL BE UP TO YOUR TAX PREPARER TO APPROPRIATELY FILE FOR THE TAX EXCLUSION ON FORM 982.  THIS TAX EXCLUSION IS VERY COMPLICATED AND WE HIGHLY RECOMMEND YOU CONTACT YOUR TAX ADVISOR PRIOR TO ENTERING INTO A SHORT SALE TRANSACTION.

Am I still the legal owner and seller of my home in a short sale?

In the state of MN, you have legal title and ownership of your home, and the right to sell it, up until 6 months after a foreclosure sale occurs.  The 6 month time frame is called your "redemption period" - the time state law allows you to come current on your mortgage obligations before the bank officially can take possession of your home.  Sometimes the 6 month redemption period is reduced to 5 weeks if the home is "abandoned" (i.e. vacant, no utilities, not listed for sale).  As the legal owner and seller of the home, you must sign the purchase agreement.  The purchase agreement will be contingent upon bank approval and your acceptance of any terms the lender requires for their approval.

What does the bank need from me to approve a short sale?

You will need to provide many documents to your lender in order for them to approve a short sale.  The documents, altogether, are called a short sale package.  The documents include:  W-2's/tax returns (2 years), pay stubs (2 months), bank statements (2 months), a financial statement outlining your income/assets/and expenses, and a "hardship" letter. The "hardship" letter is written by you, and explains to the lender why you are requesting to sell your home on a short sale.  Your realtor can assist you in drafting this letter.

Do I still “warrant” that the appliances, plumbing, electrical, and mechanical are still working on the day of closing on a short sale?

No.  The buyer will be purchasing the property "as-is".  Because you as the seller are already in financial distress, if something goes wrong with any of the appliances, mechanical, electrical, or plumbing systems, you will most likely NOT have the funds to cover the cost of any repair prior to closing. As well, the lender will not want to cover the cost of any repairs as they are already losing money.

Should I talk with any other professionals before selling my home on a short sale?

The decision to sell your home on a short sale will have legal, financial, tax and credit implications.  As realtors are not attorneys, tax accountants, or lenders, we can not give legal, tax, or credit advice.  It is our recommendation that you consult your attorney and tax professional prior to entering into a short sale transaction

How do I determine a list price for my home to sell it on a short sale?

Your realtor will complete a market analysis on your home.  Because you are already in default, and the length of time it may take to get an approval from the lender, time is of the essence!  It is important to get a purchase agreement on your home as quickly as possible.  Your home should be priced at 10% below the current market value to immediately spark buyer interest and activity.  From the list date, we recommend regular price reductions every two weeks until a purchase agreement is received.

What if I have other bad debt and I am considering filing for bankruptcy?

The bankruptcy laws are very complicated and we cannot give you advice on bankruptcy.  Please be advised that if you file for bankruptcy, this can affect your ability to sell your home, as assets are sometimes frozen by the bankruptcy court.  If you are considering filing for bankruptcy, YOU MUST CONTACT A BANKRUPTCY ATTORNEY.  AFTER you speak with that attorney, we can then continue to discuss selling your home.

How long does a short sale stay on my credit record?

Fannie Mae guidelines as of August, 2008 established a 2 year time frame that must elapse after a short sale to re-establish your credit.  These guidelines are subject to change at any time, and you must contact a lender or credit counselor to confirm this time frame.  A 5 year time frame must elapse for a foreclosure, and a 4 year time frame must elapse for a "deed in lieu" of foreclosure.

What is a deed in lieu of foreclosure?

Deed in lieu of foreclosure is a process in which you give your property back to the lender because you just can't afford the payment any more. The lender then sells off the property in order to retrieve a part or whole of the loan balance you owe.  If you are having difficulty making your mortgage payment we recommend you first try to work on a loan modification with your lender.  If your lender refuses to modify your loan, we then suggest you try to sell your home on a short sale (see short sale information).  We recommend a deed in lieu as your last option to avoid foreclosure.

How does deed in lieu work?

When you go for a deed in lieu in order to avoid foreclosure, you need to sign legal documents such as the Agreement in Lieu of Foreclosure and a Warranty deed, quit claim deed or a grant deed. The first document reveals the terms and conditions of the deed-in-lieu, and is signed by both the lender and borrower. The second document, which is the deed, conveys legal ownership of the property to the lender.

The lender marks the borrower's note as "paid" and provides the latter with two forms - one which states that the debt is canceled and the other which refers to the waiver of the right to a deficiency judgment (the lender's right to ask for the unpaid debt amount if it is not recovered totally by the property-sale).

The agreement for deed in lieu of foreclosure is executed through a closing/title company which receives the borrower's note (marked as "paid") from the lender. The closing/title company then records the deed used for transferring legal ownership of the mortgaged property and sends the note to the borrower. The borrower is thus released from the liability of the mortgage payments.

What are the tax consequences?

When you go for deed in lieu, you may have to pay 2 types of taxes. These are:

• Deed tax: Since deed in lieu foreclosure involves transfer of property, the borrower needs to pay state deed tax upon conveyance of property to the lender. The deed tax is .0033 x the mortgage amount.  The tax is calculated on the difference between the fair market value of your property and your mortgage balance plus liens removed from the property due to deed in lieu. It may vary from one county to another.
• Income tax on canceled debt: As per Mortgage Debt Forgiveness Tax Relief Act (applicable till the end of 2009), one need not pay tax on canceled debt (unpaid loan balance which is forgiven by lender) resulting from deed in lieu. However, a borrower needs to satisfy certain conditions for mortgage tax relief.

Is loan modification better than deed in lieu?

Mortgage loan modification is surely a better option than deed in lieu foreclosure as because it helps you keep your home. At the same time, you can save your credit from taking a big hit. That's because loan modification allows you to negotiate for lower rate on your mortgage. You may also get a principal reduction on your loan.

If you have missed payments, they can be added to your loan balance and the term extended so that your monthly payments become low and affordable. So, loan modification is no doubt a better choice as compared to deed in lieu.

However, if you don't have surplus income to meet your monthly payments, you won't be approved for loan modification. In such a case, deed in lieu becomes your obvious choice if your home hasn’t sold on a short sale.

Does deed in lieu of foreclosure affect credit score?

When you go for deed in lieu of foreclosure, it does affect your credit score. Your score drops down by 250 points or so. However, you can try and rebuild your credit but the deed in lieu gets reflected on your credit report for 7 years. However, the negative impact reduces with time. At the end of the 7th year, you can request the bureaus to remove it from the report.

How long after deed in lieu can you buy home?

Since deed in lieu has a negative impact on your credit, lenders won't offer you a mortgage for at least the first 2-3 years. In the meanwhile if you try and rebuild credit, chances are that you may be approved for a loan after the 2-3 years time period. So, you can then look forward to buy a home again.

Please click on the links below or contact your Realtor who is experienced in these processes.

Loan Modification Borrower Q&A

Loan Modification Short Summary

Loan Modification Program Guideline

Loan Modification 411

HUD Loan Modification

Are you eligible for a loan modification?

Short Sales from About.com