When you purchased your home, chances are you took out a home loan and your lender took a security interest in the property. In the event that you cannot make your mortgage payments, this security interest gives your lender the right to foreclose--auction off your house and keep the proceeds in order to recover its investment.
For homeowners, the one word that invokes the most concern is foreclosure. Whether through tragic circumstances or situations beyond the homeowner's control, foreclosure is a threat that can lead to many problems in the future. Fortunately, foreclosure is something that can be avoided in times of financial trial, if one knows where to get help.
Foreclosure Definition - Foreclosure is defined as the legal process that occurs when a homeowner, or owner of any property, loses interest and ownership in the property when he is unable to make regular payments on the mortgage. In other words, a if a homeowner can't come up with the monthly amount to satisfy lenders, he can lose his home if it is foreclosed.
What is a deficiency judgement?
And, if your property cannot be sold for what is owed, a deficiency judgment could be pursued against you. Both a foreclosure and a deficiency judgment could seriously affect your ability to qualify for credit in the future.
Stop Foreclosure
If you are facing the possibility of foreclosure, you know how frightening this situation can be. But now is not the time to panic. Now is the time to explore your options.
- Are your mortgage payments too much for you to handle, even in good times?
- If your situation is temporary, there are things you can do to ward off foreclosure and get back on your feet.
- On the other hand, if you're in over your head you need to acknowledge that fact and realize that giving up the house may be the best thing for you. That does not mean you should just sit back and let the foreclosure happen. But you should not try to hold on to it.
Borrow Money From Loved Ones
If you find yourself in a temporary financial crisis, this option could be good for you. Talk to your close friends and loved ones and explain your situation to them. See if they would be willing to loan you the money you need to bring your mortgage payments up to date. If you had a co-signer on the loan, go to that person first and see if he or she can help.
Be honest about how long it will take for you to repay the loan. If you tell a person you'll pay her in a month and it takes you six months instead -- you will only cause a rift in the relationship.
Contact The Lender To Work Out A Deal
When you are going through a foreclosure, your lender may seem like the last place to turn for a sympathetic ear. But in fact, your lender may prove to be very cooperative. Why? Because they don't want you to default on your loan any more than you do. Lenders make money by collecting your principal and interest payments, NOT by foreclosing on homes. If you present your circumstances to them along with a reasonable plan that will offer you temporary relief, they may just be willing to help
To present your case, contact your lender and ask for the "Loss Mitigation Department." Once again, be honest about the amount of time it will take you to get back on your feet. Let the lender know up front if you'd like to suspend payments and for how long. Or perhaps you can make reduced payments for a few months. Either alternative is better than a foreclosure - for you and the lender. Be persistent and keep a written record of your calls, the people with whom you've spoken, and all correspondence. Should a settlement be agreed upon, insist upon a written agreement, and make sure you clearly understand the proposal terms before signing.
You may also want to contact a HUD-approved housing counseling agency like CCCS-OC. These agencies can help you interact with your Lender and determine which options best fit your needs.
Refinance Your Current Loan
Perhaps you bought your home when interest rates were high and, therefore, your payment is steep. You may be able to solve your cash flow problem simply by refinancing your debt at a lower interest rate. Shop around for the best deal on a refinance. You might also enlist the services of a mortgage broker and let him do the work for you.
Sell The House
If you are in a home that you simply cannot afford, this may be your best option. Contact a qualified realtor as soon as possible to get your house on the market and be realistic about the price. If you want to sell the home quickly, you may need to offer it for less than what you think it is worth. On the other hand, if you go for top dollar, you may not have any takers and you'll end up with a foreclosure. If you're selling the house yourself to avoid foreclosure, check to see if there are any complaints against the prospective buyer.
Understanding Credit and Foreclosure. Live rent free while you wait. Fix credit later. Free Help - Free Government Help - Stop Foreclosure - Effects on Credit - Information
Sellers may wonder whether letting a property go into foreclosure would be easier and smarter than going through a short sale. With a foreclosure, and depending on state laws regarding foreclosure, a seller could stay in the property, essentially rent free, for four months to a year before being forced to vacate. But that fact alone does not mean a foreclosure is better.
Whereas a short sale involves offering the home for sale, generally listed through MLS. Potential home buyers will make appointments to view the home, some will make lowball offers, agents might hold open houses and, in general, a seller's life will be disrupted, all in the hopes that a buyer will buy the home.
Basics of a Short Sale
Short sales happen when a lender agrees to accept less than the amount owed against the home because there is not enough equity to sell and pay all costs of sale. Not all lenders will negotiate a short sale, and that is why a real estate agent or a lawyer can be a tremendous help by contacting the lender's loss mitigation department to find out.
You can't just wake up one morning and decide you're going to sell your home at a loss by asking for a short sale. Typically, lenders won't even consider a short sale if your payments are current. Lenders will be more agreeable to negotiation if your payments are in arrears. Plus, if you have cash assets, the lender might try to tap those accounts. Doing a short sale is not for the faint of heart.
How is the Seller's Credit Affected?
According to David Steep, division manager at Vitek Mortgage, sellers will take as big a hit on their credit report by going through foreclosure as giving the lender a deed-in-lieu of foreclosure. Steep says the points lost on a FICO score are as follows:
Foreclosure or Deed-in-Lieu of Foreclosure
Both of these solutions affect credit the same. Sellers will take a hit of 200 to 300 points, depending on overall condition of credit. This means if a seller's FICO score before foreclosure was 680, it could dip as low as 380.
Short Sale
The effect of a short sale on a seller's credit report is identical to that of a foreclosure. The ding on credit will show up as a pre-foreclosure in redemption status, Steep says, which will result in a loss of 200 to 300 points. This means a short sale with a previous FICO of 720 will see it fall from 520 to 420.
Catherine Coy, a mortgage broker in southern California, agrees. "The effect on a consumer's credit report -- foreclosure vs. short sale -- is the difference between being hit by a train or a bus," says Coy.
Waiting Period Before Buying Another Home
Foreclosure or Deed-in-Lieu of Foreclosure
Steep says a seller who wants to buy another home after foreclosure will end up waiting about 36 months before a lender will offer any kind of interest rate that makes sense.
Coy says, "A notation on a consumer's credit profile of 'settled for less than owed' (short sale) precludes the consumer from obtaining an institutional loan for 36 to 60 months, depending on the lender / program and regardless of FICO score."
Short Sale
Some agents say the good news for short sale sellers is the wait is much shorter before buying another home, but that belief is a falsehood.
Can a seller buy again under two years? Not true, says Coy, "It's an utter myth that a consumer can 'can buy again in about 18 months at a good interest rate.' Fannie Mae guidelines require 36 months' seasoning for documented extenuating circumstances, and there's no way to get around this."
Short Sale / Foreclosure Deficiency Judgments
The bad news is a seller could be subject to a deficiency judgment for the difference between the loan amount and the amount paid. In California, purchase money loans are not subject to deficiency judgments; however, hard money loans, equity loans and refinances are. Some other states have laws regarding personal guarantees, which could also result in a deficiency judgment, if the home owner is held personally liable for loan repayment.
The lender has sole discretion whether to pursue a deficiency judgment in those instances when the judgment is permitted. To determine whether a pending foreclosure or short sale is subject to a deficiency judgment, talk to a real estate lawyer.
If you're a seller trying to decide whether to let a home go through foreclosure versus attempting a short sale, salvaging your credit may not be an advantage to doing a short sale.
This week, President Barack Obama signed into law the Helping Families Save Their Homes Act of 2009 to help homeowners and lenders avoid foreclosure. Previously included in this bill was a measure to allow bankruptcy judges to modify mortgage loans for principal residences, but the U.S. Senate did not pass this "cram-down" legislation. The Helping Families Save Their Homes Act of 2009 contains various new laws to address the national foreclosure crisis. Major provisions that may affect California REALTORS® and your clients include the following:
HOPE FOR HOMEOWNERS (H4H) REVAMPED: The new law loosens the H4H program requirements to help homeowners refinance out of their troubled mortgages and into more affordable, fixed-rate FHA-insured loans. Originally launched in October 2008, the H4H program intended to help 400,000 distressed homeowners, but in the program's first seven months, it only helped one family stay in its home. The maximum loan-to-value ratio for an FHA refinance is 96.5% of the appraised value. If refinance proceeds are insufficient to pay off existing liens, the existing lienholders must voluntarily agree to a short payoff, but a new inducement is an opportunity for them to share in the homeowner's equity. Other changes to the H4H program include monetary incentives for both the participating servicers of the existing loans and originators of the FHA refinance. Millionaire borrowers (with net worth over $1 million) are now excluded from the program. HUD will establish the requirements and standards to implement the H4H program as revised.
LONGER STAY FOR TENANTS OF FORECLOSED HOMES: Effective immediately, an REO lender or buyer who acquires title through a foreclosure sale must give at least a 90-day notice to terminate a bona fide tenant as defined. A 90-day notice to terminate is sufficient for a month-to-month tenant or if a new owner will occupy the property as a primary residence at the end of the 90 days. Otherwise, a tenant with a one year or other fixed-term lease with a remaining lease term exceeding 90 days can stay in the premises until the remaining lease term ends. This new 90-day notice requirement applies to foreclosures of a federally-related mortgage loan or residential real property, except for properties under rent control, rent-subsidized programs (such as Section 8), or other state laws that provide additional protections for tenants. This law expires on December 31, 2012.
NOTIFICATION OF TRANSFER OF MORTGAGE LOANS: The Truth in Lending Act now requires a lender to whom a mortgage loan is sold or otherwise transferred to notify the borrower in writing of such transfer within 30 days. The notice must include the new lender's identity, address, telephone number, authorized representative's contact information, and other relevant information. This measure should help alleviate the problem borrowers often face in determining who owns their mortgage loans.
Other provisions of the Helping Families Save Their Homes Act include a 4-year extension of the $250,000 FDIC deposit insurance to December 31, 2013, protection for loan servicers who establish qualified loss mitigation plans from liability for an alleged breach of duty to maximize mortgage values for their investors, $130 million for foreclosure prevention counseling and education, and $2.2 billion to strengthen homeless programs.
President Obama has also signed into law the Fraud Enforcement and Recovery Act (FERA) which authorizes the Department of Justice to prosecute mortgage fraud crimes against private mortgage brokers and companies that previously were not regulated by the federal government. FERA also earmarks almost $500 million for federal enforcement agencies to investigate and prosecute mortgage fraud and other fraud crimes.
If you think you are in danger of facing foreclosure, you can call the 888-995-HOPE hotline – Homeowner's HOPE(TM) and talk to a counselor who can help you assess your current situation and map out a solution. Homeowner's HOPE(TM) is a counseling service provided by the Homeownership Preservation Foundation, an independent nonprofit that provides counseling services through HUD-approved counselors.
For those in situations that could lead to foreclosure, the U.S. Department of Housing and Urban Development offers some tips to avoid it at http://www.hud.gov/foreclosure/index.cfm. Veterans facing foreclosure can find assistance and view a valuable video at http://www.homeloans.va.gov/ondemand_vets_stream_video.htm. In addition, Home Loan Learning Center provides an overview of 12 things to know about the foreclosure process before calling a lender or servicer. Also, several l enders have provided HomeLoanLearningCenter.com with a list of contact information for borrowers who may be having difficulty making their mortgage payments. You also can see what the IRS has to say about reducing the possible tax effects of foreclosure.
Most recent California foreclosure activity report -
Pre foreclosure or Notices of Default have been going down, while foreclosure sales at auction and bank owned REOs rose. Sales at auction rose by 36 percent and most of these properties werebought by third parties at around a 30% discount from market value. Notices of Default, the first step in the foreclosure process, dropped by 19 percent from the record level set the prior month. Notices of Trustee sale, which set the auction date and time, also dropped by about 9% from the prior month.
Notices of Default or NOD remained near record levels, despite falling 19 percent from March to
about 43,000 filings in California.
Notices of Trustee Sale declined by about 9 % to 29,589 filings.
in loan value. Despite the significant increase, these trustee sales remained about 40 percent lower
than the prior year, and 52.0 percent lower than the peak reached in July 2008. Nearly 90 percent
of the foreclosed loans this month were originated between January 2005 and December 2007.
Lenders took back nearly 12,000 foreclosures for which no third party bid was received representing
$5.3 in total loan value. Of these loans, nearly 99 percent were first mortgages, with many of
these foreclosures wiping out the secured interest of junior lenders. Potential losses by junior
lenders exceeded $623 Million across 6,911 wiped out junior loans.
The number of foreclosures sold to third parties increased in April to 1,634 a 52.3 percent
increase over March. Though the increase was significant, the percentage of foreclosures sold to
third parties remains just 12 percent of the total, with 88 percent going back to the lender. The
number of foreclosures sold to third parties increased 218 percent increase from April 2008.
Lender discounts at auction decreased slightly to an average of 30 - 40 percent.
The current situation has created a fire sale at some levels, starting at the most entry level homes. Realtors are reporting multiple offers within 3 days of listing, with lower priced homes facing bidding wars. It has been reported that the average home listed as a foreclosure, at the lower level, can result in discounts of up to $80,000 from regular listed properties, therefore, dragging down prices. This is a trend that will continue.
