Homeowners in crisis aren't always aware of the options they have to avoid foreclosure. The good news is that your lender doesn't want you to foreclose, either. With a little help, you may very well be able to sell your home or even stay in it.
If you’re having trouble making mortgage payments, consider a loan modification first. As with refinancing, a loan modification allows you to alter the terms of your original mortgage. But unlike with refinancing, you lack the bargaining power that comes with good credit. Still, a loan modification is often preferable to a short sale, and certainly better than foreclosing on your home.
The terms of a loan modification are set out in a document that overrides the terms in the original promissory note for the mortgage. In this new agreement, your lender may reduce your interest rate, change a variable-rate to a fixed one, and/or extend the length of the loan term in order to lower your monthly payments. In your loan modification application, your lender will require you to prove your financial hardship by providing various documents, such as:
- Your monthly mortgage statement(s)
- Recent pay-stubs, if employed, and profit/loss statements if self-employed
- Any other sources of income, including benefits such as Social Security, disability, public assistance, etc.
- Bank statements
- Utility bills
- Tax returns
Your lender may also expect a written explanation of how and why your financial situation has deteriorated since you first took out the loan. Once the new terms of your loan are established, lenders generally require a trial period of three months to make sure you are, in fact, able to submit these new payments on time.
Some lenders, including the Federal government, provide prepackaged loan modification programs for struggling homeowners. The Home Affordable Modification Program (HAMP) was created in 2009 as part of the Emergency Economic Stabilization Act, in response to the housing crisis of 2008. If you qualify for this program, you can take advantage of excellent terms for your loan modification. You can find out more about federal loan modifications at Home Affordable Modification Program (HAMP).
If you don’t qualify for HAMP, but your loan is through the VA (Veteran Administration) or through the FHA (Federal Housing Administration), you can apply for loan-modification programs specific to those agencies. Barring those options, most banks offer their own loan modification programs.
Lenders Must Notify You of Your Options
One thing lenders must do is help struggling homeowners avoid foreclosure. By federal law, lenders must inform borrowers about loss mitigation options, such as loan modifications, no later than 36 days after each payment period in which a borrower is delinquent. After 45 days of delinquency, or within 45 days of a bankruptcy filing, lenders must provide this information in writing.
Unfortunately, once your home does go into foreclosure, it becomes public record, and criminals are liable to reach out to you with great offers for loan modifications. Be very careful who you do business with. Research these companies online, and understand that is illegal for anyone to demand legal fees for a loan modification before any work is performed.
As both a lawyer and a certified Maryland real estate agent, I can help you stay in your home, sell your home, or pursue other financial options, depending on your circumstance. I have 25 years of experience helping struggling homeowners get back on their feet, and I can help you, too. Give me a call at 301.588.8468, or email me at email@example.com for a free consultation.
What Exactly is a Short Sale?
The term “short” certainly doesn't refer to the length of time it takes to complete a short sale. A short sale is when a bank—or anyone else holding a lien against a property—agrees to accept a smaller payment from the sale of the home than what the buyer had agreed to pay for it. For example, if you owe $90,000 on your home, the bank might agree to accept a payment of $60,000 from a short sale. The bank, in effect, is allowing itself to be “shorted.”
It doesn’t sound like a good deal for the bank, but a short sale can actually be as smart a move for a lender as it is for a homeowner. If a house goes into foreclosure instead, the bank might have to accept far less money for the property at auction. So if you’re having trouble making your mortgage payments, your bank really does have a strong incentive to work with you.
Getting Started on Your Short Sale
After exploring loan modifications, if you still feel a short sale is your best option, your first step is to talk to your lender. You’ll need to submit what’s known as a short sale package. This package includes documentation about the financial hardship that’s preventing you from keeping up with your mortgage payments. You'll also need to include documentation and/or copies of:
- Savings, checking, and investment account statements
- Documentation of your income
- Current bills and expenses
- All assets
Once your bank agrees to a short sale, you’ll need to find a real estate agent who truly understands short sales and foreclosures. Working as both a real estate agent and a lawyer, I can provide you with a full range of services and counsel to help you set the best terms for your short sale, or advise you on other options.
After I’ve listed your property on the market, buyers will have a chance to make offers on your home. Offers are submitted to your lender for approval, and the terms of the offer are negotiated until both lender and buyer come to an agreement.
If your lender approves your short sale under the U.S. Treasury’s Home Affordable Foreclosure Alternatives (HAFA) program, you might be finished with your sale in four months. Otherwise, the process can drag out. Once your lender does approve the sale, you can move out, the bank gets paid, and the remaining debt on the home is forgiven. If you qualify for HAFA, you may also receive $3000 for moving expenses. Not so bad!
Keep In Mind
The IRS will count your forgiven debt as taxable income. Your credit score will also be affected by a short sale, but not as dramatically as a foreclosure or bankruptcy. You might be able to apply for a new loan in as little as four years. As far as the bank is concerned, you’re a responsible person who asked for help when you needed it. The best part is probably that you can stay in your home until the sale is complete.