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Short Sales and Foreclosures

Real estate Foreclosures and Short Sale are often seen as a good buying opportunity  by people looking for their first home, and also investors looking to build a large real estate portfolio.  The good news for first time homebuyers is that as long as they are willing to put up with a maybe “not quite perfect” property, there is the possibility of developing what is referred to as “sweat equity”.  Sweat equity is simply equity, or increased value, created by the willingness of a new owner to do the clean-up and repairs many distressed properties require.

Basic

The key to success is in evaluating the repairs necessary, and being realistic about your capability to do those repairs.  Almost everyone is going to be able to trim shrubs back, mow and water the lawns and greenery on a regular basis.  One of the common factors you will find with almost all distressed real estate is the landscaping needs some serious maintenence, but it’s fairly easy to get things back into shape, and it’s not horribly expensive to do.

The second common factor with distressed property is paint.  You can drive through almost any neighborhood and find homes where paint is peeling, severely faded, or is just one of those “What were they thinking?” paint jobs.  Although bad paint on a house doesn’t necessarily signify a homeowner in distress, it’s something to look at, and learn from.  Many housing tracts were built with between 4 and 6 house plans.  If you see a “sad” looking home in a neighborhood, find another home (same model) in that area where the landscaping is maintained and there is quality paint on the house.  The difference in value and desirability is exactly what you are looking for when building sweat equity.

Real estate agents can be very valuable if you are looking for distressed property and homes in loan default. Picking an agent is something you should spend some time thinking about though, rather than just walk into a Realty office and start talking to the first agent you find.  Some agents and offices work closely with lenders and asset managers to sell properties the lenders have taken back.  If you want us to send you a free  Foreclosures List please contact us and send us a request

Foreclosures
Although foreclosure is the way lenders try to recover the loan amounts they are due, most lenders do not want to own real estate and would rather have the loan paid off, or the loan payments current.  Most homeowners who have suffered a financial setback also would like to avoid foreclosure and keep their home, but often do not have the background to be able to determine which of the available foreclosure help options will work for both the homeowner and the lender.   Fannie Mae, Freddie Mac, HUD and the VA all endorse programs designed to keep homeowners in their home if it is at all possible, or to minimize the credit and financial damage if it is not possible to avoid foreclosure.

The process of determining whether a homeowner is likely to be able to recover from a financial setback is similar to the process used when the home loan was first approved.  Personal and financial information along with supporting documentation is collected and forwarded to the existing lender, who will then approve or decline a possible workout.  In many cases, the homeowner can successfully complete this process on their own if they have the time to properly assemble a complete documentation package.

The paragraphs below cover individual aspects that should be considered when facing a foreclosure action.Once the decision has been reached about keeping or selling the home, topics are listed in order of which options are typically least expensive for the homeowner up to those which are more expensive/credit damaging.  Links to various resources are below those topics.

Workouts for Home Loans
A link explaining the various types of workouts available from many lenders. You can also click on the following link to ask questions on our   Foreclosure Discussion board.

Ultimately, the only thing that will end foreclosure proceedings is repayment of the debt, everything else is delay of the proceedings.

KEEPING THE PROPERTY VS. SELLING THE PROPERTY
If your monthly house payment (including property taxes and insurance) does not exceed 40% of your gross monthly income, it should be possible for you to keep the property. If the payment is greater than 40% of gross monthly income, consider selling or transferring the property to avoid negative impacts to your credit. The objectives in order of importance should be:

  1. Keeping the property if possible.
  2. Don’t give away equity if you can keep it or liquidate and put it in your pocket.
  3. Minimize damage to your credit. You will need it later on.

LENDER WORKOUT
Before exploring new options, have you tried to come to terms with your existing lender? Lenders want the loan to be current, not to have to complete a foreclosure. Can you make up the defaulted amount over a period of months? Can you re-write the note and include the defaulted amount? Can you give the lender a deed-in-lieu of foreclosure and preserve your credit? These are questions you should ask yourself and possibly your lender if you haven’t done so already. They will want to know why the loan is in default and why you think you will be able to make the payments in the future. Temporary financial setbacks that have since been cured are the best candidates for this. Your lender will probably not be inclined to discontinue foreclosure proceedings if they have reason to believe they will have to start again in 6 months.

REFINANCING AND NEW JUNIOR LOANS
Basic lending guidelines will require all home loans will total up to less than 70% of the current market value of the property. If you have more equity than that, you should have no difficulty in obtaining a new refinance or 2nd Trust Deed to bring your loan current. Expect higher interest rates and loan fees.

LOANS TO GET YOU CURRENT
If you experienced a temporary financial setback that has since been cured and are going to be able to keep the property, first consider family and friends for a loan to get current. It’s much cheaper than hard money loans, but MAKE SURE you will be able to pay them back. You do not want to put them in the position of having to foreclose to get their money back. Hard money loans are typically private investors who will lend money based on equity in the property. Credit and income are not issues of importance and loan approval is usually a matter of days with funding following shortly. Loan amounts will usually be enough to bring existing loans current, pay the financing costs and put some money in your pocket. Loans will be amortized over 30 years to keep the payments lower and the balance will be due in 2 to 5 years.

BANKRUPTCY
This is a major step that will have lasting impact on credit reports. Seek appropriate legal advice. If the Notice of Default or Lis Pendens has just been filed on your home, you have sufficient time to explore the options for new loans or selling the property. If the foreclosure sale is going to be held very shortly, bankruptcy is a very common way to delay the sale. When you file bankruptcy, your financial matters fall under the jurisdiction of the courts which could limit your options. SEEK LEGAL ADVICE.

FORECLOSURE ASSISTANCE LINKS

HOW TO AVOID FORECLOSURE
HUD Foreclosure Advice

DEPARTMENT OF VETERANS AFFAIRS
Advice when you have trouble making payments

CONSUMER CREDIT COUNSELING SERVICE
Non-profit help for establishing a direction or plan to avoid foreclosure.

PRO-BONO LEGAL ASSISTANCE
If you feel you need legal help and cannot afford it, this is the ABA directory state by state of legal providers doing pro-bono (without fee) work.

DEBT WORKOUT LINKS
What appears to be useful information and links for getting your financial house in order.

REINSTATEMENT SERVICES, INC.
Fee for service.   Lender workout assistance for preventing foreclosure.

VOLUNTEER LAWYERS PROJECT
MAINE Pro-bono assistance

AVOID FORECLOSURE – FORECLOSURE HELP NATIONWIDE
Foreclosure prevention utilizing nationally recognized Mortgage Assistance Programs. Foreclosure help without Bankruptcy. Keep your home.

How To Stop It

The guidance below (and in the “How to Avoid Foreclosure” pamphlet) is applicable to homeowners with FHA Insured loans. While a good deal of this information may apply to all homeowners in danger of losing their homes, not all of the foreclosure avoidance tools mentioned may be available to you if you have a VA or conventional loan. Additionally, HUD/FHA does not have any Loss Mitigation oversight over VA or conventional loans. Please contact your lender or a housing counseling agency.

Q: What Happens When I Miss My Mortgage Payments?

Foreclosure may occur. This is the legal means that your lender can use to repossess (take over) your home. When this happens, you must move out of your house. If your property is worth less than the total amount you owe on your mortgage loan, a deficiency judgment could be pursued. If that happens, you not only lose your home, you also would owe HUD an additional amount. Both foreclosures and deficiency judgments could seriously affect your ability to qualify for credit in the future. So you should avoid foreclosure if possible.

Q: What Should I Do?

  1. DO NOT IGNORE THE LETTERS FROM  YOUR LENDER. If you are having problems making your payments, call or write to your lender’s Loss Mitigation Department without delay. Explain your situation. Be prepared to provide them with financial information, such  as your monthly income and expenses.  Without this information, they may not be   able to help.
  2. Stay in your home for now. You may not qualify for assistance if you abandon your property.
  3. Contact a HUD-approved housing counseling agency. Call (800) 569-4287 or TDD (800) 877-8339 for the housing counseling agency nearest you. These agencies are valuable resources. They frequently have information on services and programs offered by Government agencies as well as private and community organizations that could help you. The housing counseling agency may also offer credit counseling. These services are usually free of charge.

Q: What Are My Alternatives?

You may be considered for the following:
Special Forbearance. Your lender may be able to arrange a repayment plan based on your financial situation and may even provide for a temporary reduction or suspension of your payments. You may qualify for this if you have recently experienced a reduction in income or an increase in living expenses. You must furnish info information to your lender to show that you would be able to meet the requirements of the new payment plan. Mortgage Modification. You may be able to refinance the debt and/or extend the term of your mortgage loan. This may help you catch up by reducing the monthly payments to a more affordable level. You may qualify if you have recovered from a financial problem and can afford the new payment amount. Partial Claim. Your lender may be able to work with you to obtain a one-time payment from the FHA-Insurance fund to bring your mortgage current.

You may qualify if:

  1. your loan is at least 4 months delinquent but no more than 12 months delinquent;
  2. you are able to begin making full mortgage payments.

When your lender files a Partial Claim, the U.S. Department of Housing and Urban Development will pay your lender the amount necessary to bring your mortgage current. You must execute a Promissory Note, and a Lien will be placed on your property until the Promissory Note is paid in full.

The Promissory Note is interest-free and is due when you pay off the first mortgage or when you sell the property.

Pre-foreclosure sale. This will allow you to avoid foreclosure by selling your property for an amount less than the amount necessary to pay off your mortgage loan.

You may qualify if:

  1. the loan is at least 2 months delinquent;
  2. you are able to sell your house within 3 to 5 months; and
  3. a new appraisal (that your lender will obtain) shows that the value of your home meets HUD program guidelines.

Deed-in-lieu of foreclosure. As a last resort, you may be able to voluntarily “give back” your property to the lender. This won’t save your house, but it is not as damaging to your credit rating as a foreclosure.

You can qualify if:

  1. you are in default and don’t qualify for any of the other options;
  2. your attempts at selling the house before foreclosure were unsuccessful; and
  3. you don’t have another FHA mortgage in default.

Q: How Do I Know if I Qualify for Any of These Alternatives?

Your lender will determine if you qualify for any of the alternatives.

A housing counseling agency can also help you determine which, if any, of these options may meet your needs and also assist you in interacting with your lender. Call (800) 569-4287 or TDD (800) 877-8339.

Q: Should I Be Aware of Anything Else?

Yes. Beware of scams! Solutions that sound too simple or too good to be true usually are. If you’re selling your home without professional guidance, beware of buyers who try to rush you through the process. Unfortunately, there are people who may try to take advantage of your financial difficulty. Be especially alert to the following:

Equity skimming. In this type of scam, a “buyer” approaches you, offering to get you out of financial trouble by promising to pay off your mortgage or give you a sum of money when the property is sold. The “buyer” may suggest that you move out quickly and deed the property to him or her. The “buyer” then collects rent for a time, does not make any mortgage payments, and allows the lender to foreclose. Remember, signing over your deed to someone else does not necessarily relieve you of your obligation on your loan.

Phony counseling agencies. Some groups calling themselves “counseling agencies” may approach you and offer to perform certain services for a fee. These could well be services you could do for yourself for free, such as negotiating a new payment plan with your lender, or pursuing a pre-foreclosure sale. If you have any doubt about paying for such services, call a HUD-approved housing counseling agency at (800) 569-4287 or TDD (800) 877-8339. Do this before you pay anyone or sign anything.

Q: Are There Any Precautions I Can Take?

Here are several precautions that should help you avoid being “taken” by a scam artist:

  1. Don’t sign any papers you don’t fully understand.
  2. Make sure you get all “promises” in writing.
  3. Beware of any contract of sale of loan assumption where you are not formally released from liability for your mortgage debt.
  4. Check with a lawyer or your mortgage company before entering into any deal involving your home.
  5. If you’re selling the house yourself to avoid foreclosure, check to see if there are any complaints against the prospective buyer. You can contact your state’s Attorney General, the State Real Estate Commission, or the local District Attorney’s Consumer Fraud Unit for this type of information.

Q: What Are the Main Points I Should Remember?

  1. Don’t lose your home and damage your credit history.
  2. Call or write your mortgage lender immediately and be honest about your financial situation.
  3. Stay in your home to make sure you qualify for assistance.
  4. Arrange an appointment with a HUD-approved housing counselor to explore your options at (800) 569-4287 or TDD (800) 877-8339.
  5. Cooperate with the counselor or lender trying to help you.
  6. Explore every alternative to keep your home.
  7. Beware of scams.
  8. Do not sign anything you don’t understand. And remember that signing over the deed to someone else does not necessarily relieve you of your loan obligation.
How To Buy It
Buying Foreclosures
Not all foreclosures and short sales are profitable. To pull a home out of foreclosure, buyers need to make up back payments to the lender, pay all imposed fees and either pay off the loan or make arrangements to sell the property. Few lenders will let a buyer assume an existing obligation. There are three ways to purchase: from the seller in foreclosure, negotiating a short sale or buying from the lender after a public auction (REO).

At Auction
Buying a Home at the Trustee’s Sale can be done by checking your local papers or auction house websites.  Check with your local county office to find out how sales in your area are handled, but common threads among most of them are:

  • No loan contingency
  • Sealed bids or Auction
  • Proof of financial qualifications
  • Sizeable earnest money deposits
  • Purchase property “as is”
  • Paying all taxes, transfers, and title work

Sometimes buyers are not allowed to inspect the house before making an offer. The problem with buying a house sight unseen is you can’t calculate how much it will cost to improve the structure or bring it up to habitable standards. Nor do you know if the occupant will retaliate and destroy the interior . On top of that, you may need to evict the tenant or owner from the premises after you receive title, and eviction processes can be costly.

Check the Public Records
Do your research before making an offer to purchase. Your agent can find out who is in title, whether a foreclosure notice has been filed and how much is owed to the lender(s). This is important because it will help you to determine how much to offer.

Short Sale
When lenders agree to do a short sale in real estate , it means the lender is accepting less than the total amount due. Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose. If you are considering buying a short sale , there could be drawbacks. For your protection obtain legal advice from a competent real estate lawyer or call an accountant to discuss tax ramifications.

TIPS ON SHORT SALES
A short sale in real estate is when the outstanding obligations (loans) against the property are greater than what the property can be sold for. The borrower (seller) proposes that the lender accept a compromised (reduced) payoff amount upon the sale of the property.

THE PROCESS:

  • The seller must be in arrears with their loan. However, it is possible the lender may consider a short sale based on hardship without the loan being in arrears. Confirm with lender.
  • Contact the lenders loss mitigation department, your contact needs to be a decision maker or a supervisor. Make sure they will consider a short sale and confirm the requirements.
  • Request a short sale packet from the lender.
  • Provide the lender with a release authorization letter signed by the sellers authorizing third parties; i.e., the listing agent, the seller’s attorney to negotiate with the lender directly.
  • Determine the value of the property. Prepare Comparative Market Analysis.
  • Estimate the closing costs.
  • Determine the amount owed against the property.
  • Do the calculations.
  • Compose a hardship letter explaining why the seller cannot pay the loan and needs to sell by short sale
  • Obtain a ratified contract contingent upon the seller’s lender approving the short sale.
  • Provide the lender with a copy of the ratified sales contract, listing agreement, and a preliminary HUD-1 with all the costs associated with the closing noted.
  • If repairs are required provide the lender with photos and estimates.
  • The lender may order a “broker’s price opinion” or an appraisal giving the lender an idea of market value of property.
  • Wait for lender approval in order to close on the property. It can take up to or more than 45-90 days.
  • Lender may require a reduction in real estate commissions to complete a short sale.

THE IMPLICATIONS:
The lenders loss may be reported to the IRS as income to the borrower. Talk to an accountant/attorney.

Lender may require the sellers to make up the difference, by personal obligation, unsecured note, or a collection. Lender may report adverse credit to credit bureaus.

THE LENDER’S SIDE:

  • Is the seller deserving of a break?
  • Is it cheaper for the lender to foreclose?
  • How many other properties does the lender currently have in default?
  • How many other properties does the lender have as Real Estate Owned (REO) inventory?
  • Are there co-signors that can be held accountable for the balance of the loan?

REO Sales
What are REOs – Real Estate Owned?

  • Buying an REO is similar to buying a short sale except the property is already owned   by the lender.
  • The property was acquired by the lender through a foreclosure action.
  • Often lenders will sell repossessed homes for less than the past loan balance.
  • Bank-owned properties are called REOs, meaning real estate owned by the lender.

Banks end up owning the property when nobody at the public auction bid enough to cover the amount owed against the property. REO homes are often considered the best way to buy a distressed property because the seller is already out of the picture. It’s just the investor, the investor’s agent, the bank and the bank’s agent who are negotiating the transaction. Most REOs can be purchased through real estate companies.

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