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YOUR OPTIONS
Every homeowner's situation is unique and each lender has their own policies regarding the use of these programs to stop foreclosure. Our experience and working relationships with mortgage lenders allows us to help you avoid the common pitfalls that many homeowners will encounter while trying to work things out directly with their lender.
REINSTATEMENT OPTION
Definition: The repayment of all past due payments, late fees, penalties and costs due on an obligation secured by a deed of trust, or mortgage with the effect of reinstating the normal terms of the loan.
According to CALIFORNIA CIVIL CODE SECTION 2924c: "...you may have the legal right to bring your account in good standing by paying all of your past due payments plus permitted costs and expenses within the time permitted by law for reinstatement of your account, which is normally five business days prior to the date set for the sale of your property. No sale date may be set until three months from the date this notice of default may be recorded (which date of recordation appears on this notice)".
Reinstatement will offer you the quickest method for resolving a foreclosure, however this option for most California homeowners is not possible.
REPAYMENT OPTION
One of the most common methods to avoid foreclosure is the Repayment Option.
Lenders will generally offer terms of 12 months for you to repay your past due amount. Homeowners are required to make their regular monthly payment plus 1/12 of the past due amount each month for 12 consecutive months. For example, if the total past due is $6000.00 and the regular monthly payment is $1000.00, the monthly payment on a Repayment Plan will be $1500.00.
If you experienced a short term financial hardship and are now financially back on your feet a Repayment Plan is an option.
The disadvantage of a Repayment Plan besides paying a higher monthly payment is the terms of your loan remain the same.
It is important to point out, your servicing company may not have your best interests in mind by putting you on a Repayment Plan. Repayment Plans are advantageous to mortgage servicing companies for two reasons. First, Repayment Plans are used to keep delinquency rates artificially low. For example, a loan classified as 30 days past due will not progress to the 60-day category as long as it is on a repayment plan; a 60-day delinquency put on a plan will not move to the 90-day category, and so on. Repayment Plans are especially used to minimize or mask the 90-day-plus category of delinquencies.
The second reason is that servicers are so swamped and understaffed, Repayment Plans end up being an effective form of “triaging” troubled borrowers.
Regardless, of your servicing company's reason for wanting to put you on a Repayment Plan make sure the terms of the Repayment Plan are not setting you up for failure.
LOAN MODIFICATION
If you can currently make your regular payment, but you can't catch up with the past-due amount, Loan Modification or Loan Restructuring is a common option to avoid foreclosure.
This option includes changing the original terms of the mortgage through one or a combination of the following methods:
Increasing the loan balance to cover any past-due amounts, including interest and escrow. The new balance will be re-amortized over a new period of time.
Extending your loan for a longer period of time thereby increasing the number of payments to pay off the loan.
A Loan Modification will change your existing mortgage note and requires the prior approval of the investor. A modification fee will be charged as well as a cash contribution toward compliance with any additional requirements of the bank and/or investor.
LOAN REFINANCE
Refinancing can be a valid option even though your credit score has been negatively impacted due to missed mortgage payments. However, many homeowners in foreclosure or seriously delinquent try to refinance their existing first home loan in an attempt to lower their monthly payments or get enough cash out to pay off their past due amount and other debts they may have.
Most of the time this is the wrong strategy to pursue. Here's why:
Your new loan will likely be at a higher interest rate than your existing loan, and you'll be making higher payments for many years.
Paying off your existing first loan may result in steep prepayment penalties.
You may not qualify for cash out, depending on your FICO score.
Depending on your credit score, financial position, and delinquency, you can spend valuable time trying to qualify for a loan you'll never get.
A better strategy to pursue if you have enough equity in your home, is a Private Money 2cd Trust Deed. To qualify, your loan to value ratio (LTV) cannot be more than 70%. For example if your home is worth $400,000 and your current loan balance is $200,000 your LTV is 50% - $200,000 divided by $400,000. In this example you can borrow $80,000 dollars. Your new balance will be $280,000. $280,000 divided by $400,000 equals a LTV of 70%.
Private money loans are based on equity and the ability to repay the loan, instead of credit scores and payment history. They are suited for self employed borrowers who may have difficulty substantiating income. Borrowers can be in foreclosure and still qualify. Properties can be Owner occupied or Non-owner occupied.
In most cases, borrowers will actually save money getting a higher interest rate 2nd Trust Deed instead of refinancing their first loan. With a new 2nd Trust Deed your first mortgage stays at the current low interest rate, and you only pay a higher rate on a much smaller, second loan.
LOAN FORBEARANCE
This plan works for borrowers who are experiencing a temporary hardship, such as a sudden living expense increase or income loss.
Your lender may allow you to reduce or suspend payments for a short period of time and then agree to another option to bring your loan current. A forbearance option is often combined with a reinstatement plan when you know you will have enough money to bring the account current at a specific time. The money might come from a hiring bonus, investment, insurance settlement, or tax refund.
We will negotiate with your lender to explain why a forbearance plan is an applicable solution which will allow you time to get back on your feet, or sell your property.
PARTIAL CLAIM (FHA loans only)
If you have an FHA Loan, and can document temporary financial hardship, we can negotiate with your lender for a Partial Claim.
We can help you get a one-time interest-free loan from your mortgage guarantor to bring your account current. You may be allowed to wait several years before repaying this loan. You qualify for an FHA partial claim if:
Your loan is between 4 and 12 months delinquent
You are able to begin making full mortgage payments again
The property is your primary residence
When your lender files a partial claim, HUD will pay your lender the amount necessary to bring your mortgage current. You must sign 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.
SHORT SALE or PRE-FORECLOSURE SALE
The Short Sale (PFS) allows the homeowner in default to sell his/her home and use the net sale proceeds to satisfy the mortgage debt even though these proceeds are less than the amount owed.
If other foreclosure alternatives, such as Loan Forbearance plans or Loan Restructuring, are unlikely to succeed because of the homeowner's financial situation and/or no desire by the homeowner to retain ownership of the property, then the Short sale may be the most suitable course of action.
It is important to note a Short sale must be approved by your lender.
The advantage of a Short sale over a foreclosure is that you avoid having a foreclosure on your credit file for ten years. Also if a Short Sale is negotiated properly with your lender you can avoid a possible deficiency judgment. A deficiency arises when the house is sold for less than the amount of the loan.
Deficiency Judgment - See California Code of Civil Procedure Section 580. The Code states if the Deed of Trust is a purchase money loan secured by a house that is the borrower's principal residence, the answer is generally, “No.” However for refinance loans or home equity lines of credit a lender could go after the borrower.
Whether you decide on a Short sale or lose the home to foreclosure you may liable for income taxes on the difference.
For instance, if the foreclosed homeowner has a $500,000 loan and the lender sells the house for $450,000, the homeowner will have to pay taxes on the $50,000 difference. The $250,000 tax exemption for singles and $500,000 for joint filers does not apply to debt relief income, in this case the $50,000.
The tax owed on the debt relief is based on the homeowner's ordinary income tax rate, not the lower capital gain rates. The exclusion, however, may still be available to reduce any capital gains in the difference between the sales price and the homeowner's basis.
DEED-IN-LIEU OF FORECLOSURE
The Deed-in-Lieu of Foreclosure allows a homeowner in default, who does not qualify for any other Loss Mitigation options, to sign the house back over to the lender company.
As a last resort, a homeowner can “give back” their property and the debt is forgiven. This will not save the house, but it is less damaging to your credit rating than foreclosure. This option might sound like the easiest way out, but it has limitations:
The homeowner will usually have to try to sell the home for its fair market value for at least 90 days before the lender will consider this option.
The homeowner must provide documentation of a reduction in income or an increase in living expense, and documentation, which verifies the borrowers need to vacate the property.
This option may not be available if you have other liens, such as other creditor judgments, second mortgages, and IRS or state tax liens.
The property must be owner-occupied, no “walk-a ways” or investment properties.
There may be income tax consequences as a result of the Deed-in-Lieu of Foreclosure.
The homeowner must provide evidence that certain utilities, assessments, and homeowner's association dues are paid in full to the transfer date unless otherwise agreed to by the parties.
The advantages are:
The borrower avoids the public notoriety of a foreclosure proceeding.
In exchange for the deed-in-lieu, the lender may waiver all deficiency judgment rights. Negatively affects credit rating but less than a foreclosure.
Warning: Do Not Under Any Circumstances Add Anyone to the Title of Your Property, Who Promises to Stop Your Home from Foreclosure.
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