Tips for Sellers

Federal Programs to Help Homeowners Avoid Foreclosure

Wednesday, February 03, 2010

In February 2009, the Obama Administration announced “Making Home Affordable”, an initiative designed to help homeowners avoid foreclosure. Making Home Affordable includes the following three programs: Home Affordable Refinance Home Affordable Modification Foreclosure Alternatives

Home Affordable Refinance
Borrowers who are current with their mortgage but feel they cannot refinance due to declining home values may consider Home Affordable Refinance. Under this program, borrowers may refinance 30 or 15 year, fixed-rate loans.
Eligibility criteria are:
1) The Property must be Owner occupied
2) The Property must be a one -to- four-unit home
3) The existing mortgage must be owned or backed by Fannie Mae or Freddie Mac
4) The existing mortgage must have a loan-to-value (LTV) ratio above 80% but not more than 105%
5) The borrower must be current with their existing mortgage payments
6) The borrower must have enough income to support the new mortgage payments
The website for Making Home Affordable is: http://www.MakingHomeAffordable.gov Go there for more information and to use the easy-to-use, online tools to assess whether or not you meet their eligibility criteria.

Home Affordable Modification
Homeowners struggling to stay current with mortgage payments because of a change in income or other financial hardship, may seek a loan modification via Home Affordable Modification. Home Affordable Modification is a voluntary program with participation from major mortgage servicers, including, but not limited to, Chase Financial, GMAC Mortgage, Countrywide, and Wells Fargo.
Eligibility criteria are:
1) The Property must be Owner occupied
2) The Property must be a one -to- four-unit home
3) The existing mortgage must have an existing principal balance that is equal to or less that $729,750 for one-unit properties
4) The existing mortgage must have been originated on or before January 1, 2009
5) The existing mortgage payments must exceed 31% of the borrower’s gross monthly income
6) The borrower must be at risk of imminent default, or in default
Again, the website for Home Affordable Modification is: http://www.MakingHomeAffordable.gov If deemed eligible, qualified borrowers are put on a three-month trial period with a modified interest rate and mortgage payment. If the borrower is successful in making payments, the participating mortgage servicer executes an agreement that lowers the interest rate to a fixed rate for five years with caps that will allow the rate to stay at a low rate for the remaining life of the loan.

Foreclosure Alternatives
For borrowers who meet the eligibility criteria for Home Affordable Modification but do not qualify for a modification, Foreclosure Alternatives may be considered. Under this program, borrowers and mortgage servicers are provided incentives, and documentation is standardized, to help facilitate short sales.
Incentives are:
$1,000 for servicers for successful short sales
$1,500 for borrowers to help with relocation expenses
Up to $1,000 toward the cost to pay off junior lien holders to release liens
Other features of this program are:
Depending on market conditions, 90 days up to one year to market and sell the property
No foreclosure may occur during the marketing period specified in the short sale agreement.
Mortgage servicers may not charge fees to borrowers for participating in Foreclosure Alternatives
For more information, go to http://www.treas.gov

- Scott Askew

Posted in: Intown Atlanta Real Estate News

Let’s Do A Short Sale!

Thursday, January 21, 2010

Are you crazy? A Short Sale? Do you know what one is and how difficult it is to close a short sale transaction?

Let’s start with the basics:

A short sale is when a lender is asked to accept a payoff on a loan for less than it is legally entitled. Why on earth would a lender agree to this? The lender can hold the borrower responsible for every penny owed! Yet, more and more lenders are now reluctantly approving short sales because they see this as a way to possibly mitigate their loss.

Lenders are very much aware of how the real estate market has suffered from our recent economic downturn. They know many have lost jobs, or had reductions in their income, which can lead to a borrower’s inability to make their mortgage payment.

Lenders also know that foreclosing on a property in Georgia, while a much easier proposition than many states since we are a “non-judicial foreclosure state”, is a costly and fairly long process. And once a foreclosure is completed, the bank owns a property they must then maintain, insure, etc. Which then causes the bank to up its reserves which then upsets its shareholders… which is not a good thing. So, lenders have begun to recognize that in some instances, short sales will actually minimize their loss.

If you are a financially distressed Seller, please note that a short sale will damage your credit. It is debateable if the damage to your credit is less, equal to, or greater, than being foreclosed upon.

If you are a Buyer who has successfully survived the arduous short sale process, you usually obtain a property for a good price… although many properties bought via a short sale will require work because, after all, the Seller who could not afford the mortgage payment is probably not interested in maintaining the property. So you at least will have deferred maintenance to catch up on soon… which requires more money.

You still want to proceed with pursuing a short sale? Here’s what you need to do:

If you are the borrower/Seller, here are five, basic questions you need to be able to answer “yes” to in order to potentially qualify for a short sale:

1) Has the value of your home dropped?
The bank will want to see a CMA (Competitive Market Analysis), or BPO (Broker Price Opinion), that shows a deteriorating market has cause your property value to fall below the outstanding balance of your first mortgage. (The second mortgage and open equity lines are another story.)

2) Are you in default with your lender?
If you are in default, the lender is more likely to consider a short sale. But do not withhold paying the mortgage payment due if you can pay it, thinking that your non-action will hasten the lender’s wiliness to do a short sale. On the contrary, if the lender sees you have assets and can afford to pay the mortgage due, they are less likely to work with you.

3) Can you submit a ‘hardship letter’ that explains why you are unable to continue making mortgage payments?
Viable explanations include: job loss: divorce; death; medical emergency; an interest rate adjustment that caused an increase in your mortgage payment to a level that was impossible to meet; and bankruptcy.
Examples that do not constitute a hardship would be: you just bought at the wrong time and the prices of homes in the neighborhood are now lower than what you paid; you are expecting more children and need a larger home; you’ve decided you do not like maintaining a home, so you want to move to an apartment; you don’t like your neighbors.

4) Can you show you have no assets?
The lender will want to see your past two year’s tax returns and a current financial statement.

5) Do you have a Buyer who has made a bona fide, written, offer to purchase?

If the lender does agree to a short sale, the lender could have the right to issue you a 1099 for the ‘shorted’ difference due as a result of a provision in the IRS code concerning debt forgiveness. Seek an attorney’s and your CPA’s guidance on this to determine the amount of a short sale’s tax consequence and whether you can afford to pay possible taxes due.

And, please remember that a short sale is not good for your credit rating.

If you are someone who is bent on pursuing a short sale purchase, hire an agent who understands the short sale process, ( like a few of us at Fourteen West, REALTORS), and be prepared to wait, wait and wait a bit longer for the lender to respond to your offer, much less to close on the transaction.

Other important ‘details’ involved in a short sale:

The process gets far more complicated if there is more than one lender currently involved with the property. Second mortgage and equity line holders are typically the ones that stand to lose the most, so they will not be cooperative. Think about it - the first mortgage is usually not getting all they are entitled, so it stands to reason that the second mortgage holder will get zero/nada/nothing. You think they are going to be cooperative?

You can attempt to minimize the damage to a Sellerr’s credit rating by convincing the lender not to report the short sale as a ‘black mark’ on the Seller’s record. Encourage the lender to report the indebtedness to be marked as ‘paid - settled for less than originally owed’. If successful, this will be far better than a foreclosure on your record… but it is still negative and will have an effect for a number of years.

Remember - Time Is Of The Essence! Do everything you can to get the lender to move as quickly as possible. We oftentimes recommend a short sale specialist to assist our Sellers with the process. This specialist is not a licensed real estate agent; but is paid a flat fee out of the sale proceeds. Their job is to consistently stay on top of the situation/lender to keep the process moving.

The Mortgage Forgiveness Debt Relief Act of 2007 does afford Sellers who go the short sale route a tax break by changing the way the forgiven mortgage amount is viewed for tax purposes. Consult with your CPA for details.