Foreclosure is one of the most devastating financial challenges that a family can face and one that many times can be avoided. The options available to residents for foreclosure are many, including but not limited to short sales. Following is a brief explanation of these solutions:
1) Loan Modification and HAMP
A mortgage modification involves the reduction of one of the following: the interest rate on the loan, the principal balance of the loan, the term of the loan, or any combination of these. These typically result in a lower payment to the homeowner and a more affordable mortgage. However, there are some qualifications:
- Must be a primary residence
- Cannot be investor-owned
You also must submit lengthy documentation to your lender including: tax returns, hardship letter, financial statements, pay stubs, unemployment benefits, bank account statements, utility bills and possibly more. This can be a lengthy process with no guarantees.
Pros: You get to stay in your home
- If you are obtaining a modification under the Obama Plan (HAMP), there is a three month trial period. Any foreclosure sale will be temporarily suspended during the trial period.
- Take a look at this article in the Wall Street journal Most Successful modifications reduce borrowers principal
- Negative equity: many Los Angeles homeowners attempting a modification eventually turn to short sales or walk away as they simply cannot obtain a permanent solution to low income.
- Some lenders have reported trial period adjusted payments as “partial payments” to credit bureaus since you are not paying the original PITI amount that your loan documents called for. This hardly seems fair to the homeowner!
What makes a good modification from a homeowners perspective?
- It is reasonable in relationship to the homeowners income
- It has a reasonable relationship to the home’s value
- It is a permanent solution
2) Rent the Property
A homeowner who has a mortgage payment low enough that market rent will allow it to be paid, can convert their property to a rental and use the rental income to pay the mortgage. If you purchased your home after January of 2004, it is very common in Los Angeles that the rents one can realistically obtain for their home will not be sufficient to cover the entire mortgage payment. In this case, the homeowner would have to pay the deficit each month. If your property is in foreclosure, you must notify a perspective tenant of this fact!
3) Deed in Lieu of Foreclosure
Also known as a ‘friendly foreclosure,’ a deed in lieu allows the homeowner to return the property to the lender rather than go through the foreclosure process. Lender approval is required for this option, and the homeowner must also vacate the property.
Problem: I have yet o see a lender accept a Deed in Lieu of foreclosure in Los Angeles without first attempting to sell.
Many have considered and marketed bankruptcy as a ‘foreclosure solution,’ but this is only true in some states and situations. If the homeowner has non-mortgage debts that cause a shortfall of paying their mortgage payments and a personal bankruptcy will eliminate these debts, this may be a viable solution.
5) Service members Civil Relief Act (military personnel only)
If a member of the military is experiencing financial distress due to deployment, and that person can show that their debt was entered into prior to deployment, they may qualify for relief under the Service members Civil Relief Act. The American Bar Association has a network of attorneys that will work with service members in relation to qualifying for this relief.
6) The California Foreclosure Mediation Program
Mediation provides a process where the homeowner, the lenders representative, and a neutral third party (Mediator) can meet in person and exchange proposals in order to avoid a foreclosure. Both parties have to negotiate in good faith. If a homeowner request mediation in the proper timeline and in the proper manner. the lender may not foreclose until a meditation has been completed!
- Must be primary residence
- Homeowner must complete and return the Election of Mediation form and required paperwork within 30 days of being served a Notice of Default
- Homeowner cannot not have a current open bankruptcy
- Homeowner has not previously surrendered the property
- $200 fee to homeowner
- Electing mediation may not buy you more time to stall a foreclosure
- You get to present your case. You better be prepared!
- You may win, by showing it reasonable for them to modify the loan or to accept short sale terms previously presented.
7) Short Sale
If a homeowner owes more on their property than it is currently worth, then they can hire a qualified real estate agent to market and sell their property through the negotiation of a short sale with their lender. This typically requires the property to be on the market for sale and the homeowner must have a financial hardship to qualify. Hardship can be simply defined as a material change in the financial stability of the homeowner between the date of the home purchase and the date of the short sale negotiation. Acceptable hardships include but are not limited to: mortgage payment increase, job loss, divorce, excessive debt, forced or unplanned relocation, and more. This is one of the most understood options for homeowners in foreclosure. This is the only true win/win scenario and it allows owners to move on with their lives with little or no recourse. Yes, you will need to eventually move from your home but it usually allows you to walk away free and clear. It basically works like this. The bank knows that it is going to lose a lot of money if it forecloses on you so they say you can go ahead and sell your home for whatever it is worth in today’s bad market. Once you get an offer, your representative will work with the bank to get them to accept that offer as payment in full, even though you may be considerably upside down on the value. The bank will take the money that they can get right now and “write off” the difference. The agent here in Los Angeles that is representing your best interest will want to do their best to get the bank to allow you to sign off at the closing with no deficiency so you are free and clear! The downside is that yes, you will need to move when it sells…but not until it sells; which may take several months or so. However this will in most cases STOP the foreclosure proceedings immediately and will DRASTICALLY increase the speed at which you can repair your credit. It’s much better to show several months of “late pays” than it is to show a foreclosure repossession and a deficiency judgment that you will owe for a long time down the road. Not only does it make it hard to live on half of your paycheck, but it’s also very embarrassing to deal with when banks begin a law suit for your assets because of foreclosure deficiencies. A successful Short Sale can eliminate all of this and allow you to truly get a fresh start.
This represents only a summary of some of the solutions available to homeowners facing foreclosure. I would like to offer our service to evaluate your individual situation, property value, and possible options. There is a huge difference between Life after a foreclosure and Life without a foreclosure! Allow me to be your advocate. There is an alternative…if you qualify!
Understanding your options now could mean all the difference in the world.
IMPORTANT GOVERNMENT DISCLOSURE: You may stop doing business with us at any time. You may accept or reject the offer of mortgage assistance we obtain from your lender (or servicer). If you reject the offer, you will not have to pay us for our services. The above brokerage is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan.