Foreclosure isn’t only annoying for the homeowner. It’s also considered as a non preferable choice even for banks. However, if they have to protect their properties; then they’ll not hesitate a single minute to foreclose on your property. The worst thing that a homeowner could do is ignoring the lender’s letters. If you do that then you’ll only make it tougher for you. The thing you should keep in mind is to contact the lender as soon as you’re not able to afford any further mortgage payments. There are several options that make you avoid foreclosure and there are several others to stop it. However, it’s up to you and your lender to decide which one is more suitable for you both

Ways to avoid foreclosure:

1- Changing the terms: when you contact the lender, you might come to a solution of changing several terms in your first mortgage agreement. These terms can be: the interest rate, extend the payment period…etc

2- Forbearance: This only happens when you face a circumstantial or short term financial hardship. The lender may suspend or at least reduce your mortgage payments until you’re established again. The bank will only approve this if you have 1 to 2 missed payments. So try to act as soon as you face any financial problem. This option can also be combined with other options like the ones discussed bellow.

3- Debt forgiveness: this decision is rarely taken by the lender. It means that the bank will forget about your few missing payment only if you agree that you’ll never fall short again.

Ways to stop foreclosure:

If you don’t act quickly when you miss several mortgage payments, then the lender will fill you a default notice. When this happens, you’re going to end up with very limited options (that’s why you need to act faster). If you manage to repay those missed payments, then your bank may issue you a reinstatement of your loan. However, if you can’t pay; then here are several other options to stop foreclosure:

1- Short sale: This option is probably what people are doing right know as it has the least negative effects on you. If your house value happens to be less than your mortgage balance, then you might consider short selling your property. If you happen to get approval from the bank, you should proceed with the house sale as soon as possible.

2- Deed-in-lieu: This option is considered as the last resort if nothing works for you. In order for you to avoid foreclosure and its various effects on your credit, you might want to give back your property to the bank. I know that making this decision is very tough, but at least it won’t affect your credit rating.

No matter what option you choose, you need to act as quickly as possible and not ignore the lender’s letters. If you act sooner, then there will be tons of option that you can consider without receiving too much damage.

Imagine that a person lives in a property that has a mortgage balance of $400.000. If the real value of the house is less than the actual mortgage balance (let’s say $300.000), then this person will be paying more than what the house worth. If the difference between the mortgage balance and the real house value isn’t big, then most people will keep paying the lender (most times it’s the bank) until they complete their mortgage. However, if the difference is too big; the property owner begins to consider what we call “A Short Sale”.

The right way to define short sale

A short sale happens when the mortgage balance is more than the actual property value in the market. If the homeowner isn’t able to afford any further mortgage payment; then s(he) might consider short selling the house in order to avoid foreclosure.

You now might be wondering about what happens to the amount left between the mortgage and the house value that your lender still owes you? Well, most of the times you can manage to get that remaining debt forgiven. However, you need to check with your bank first before you proceed with your short selling.

Are there any further short sale tax implications?

Unlucky for the short seller, the IRS considers the amount forgiven on your remaining mortgage balance as actual income and so it’s a subject of tax. However in 2007, George Bush passed the Mortgage Forgiveness Debt Relief Act which excludes you from paying taxes on that forgiven debt but only until the act ends on December 31, 2012.

After knowing the right way to define short sale, you need to check with your short sale agent if you are considering proceeding with it seriously.

So how does short sale work?

Many people think that they will never get the bank approval on a short sale. If you think logically, then there is no reason for a lender (bank) to approve your short sale as they are going to lose the difference between the mortgage balance and the property value. In the previous example, the remaining balance is $100.000. So why would the bank approve your short sale?

As there are many unpleasant ramifications to foreclosure for the property owner, the bank will also get a hit from it as well. There is nothing the bank hates more than foreclosures. It’s true that if they find that your financial situation allows you to pay the mortgage left; they will not approve your short sale. However, if they find out that you’re not able to pay it, then why would they lead you to foreclosure when they can avoid it by short selling (I mean you’re not going to pay the mortgage anyway). But before you contact your bank, you need to see a short sale agent to discuss the tax implication for your short sale. When you find that it’s better to short sell, then you should proceed.

Short selling your house begins with you finding a good price depending on the market value. After that, you want to contact the lender and drop them a hardship letter that explains your financial situation and why you’re not able to pay the mortgage. After the bank approves your short sale, you need to close the sale as soon as possible. If you’re concerned about the remaining mortgage balance (forgiven debt), then I’m telling you that most banks forgive that remaining debt. However, you should check with the bank before you proceed.

After knowing how does short sale work, you can check on with your short sale agent to explain thing even further.

1- Be descriptive:

It’s true that you don’t want to annoy the loss mitigator by writing a long hard to read through letter. What you need to do instead is writing a very descriptive letter explaining your real situation. By descriptive I mean including dates, facts…etc.

2- Be honest:

The worst thing that you could do when writing a hardship letter for short sale is to lie. I don’t know why people are still doing it, but I know one thing. If you don’t be honest with your real situation, then you’ll never get the bank approval.

3- Don’t complain:

Complaining inside your letter will not get you any good. Some home owners try to over complain thinking that they’ll win the loss mitigator’s heart. If you do that, then you only end up upsetting him or her and the next thing you’ll see is the bank disapproval. Your letter should only contain facts about the reasons that made you default your loan.

4- Explain your hardship:

Whether you were in divorce, lost your job, ill or having a big credit card debt, you need to state it as your main reason of not being able to pay your mortgage. You also need to state that your financial situation isn’t going to get better in the next months and that’s why you’re considering a short sale.

5- Formatting:

Your hardship letter shouldn’t be longer than one page. Here is how it’s formatted:

• On top of your letter, write down the: bank name, their address and their phone and fax number.
• Skip a line and write your request: “RE: Request for short sale – (Your Property address).”
• In the first paragraph, you should state the financial problem that made you not able to afford your payments (state the reason of hardship).
• The 2^nd paragraph should describe how you exactly got into that situation like: stating that the taxes have increased, your income has desreased…etc.
• In the last paragraph you should clearly state that you’ll not be able to pay your mortgage and that you need a short sale. You should leave your phone number or any contact info in order for the loss mitigator to be able to contact you if s(he) needs further information.

By following these steps, you’ll be able to write and effective hardship letter for short sale that the bank will approve very easily.

1- Checking tax implications:

The first thing you need to do before you consider short selling your house is to check if you’ll be a subject of short sale tax implications. With the Mortgage Forgiveness Debt Relief Act valid until December 13, 2012, you’ll get your tax forgiven by the IRS for properties that have a debt of up to $2 million.

2- Check for the remaining balance:

There are some lenders that will forgive the remaining balance between your mortgage and the actual house value, but there are other ones that don’t. To stay safe, you need to check with your bank before you consider short selling.

3- Check the market value:

If you decide to go for a short sale, then you definitely need to check the market value yourself, or ask for an estimation from a short sale agent. Going through this step will make your calculations more accurate.

4- Check with your short sale agent:

As you can do this on your own, I advise you to seek help from a professional short sale agent. An expert agent could get your short sale approved by the bank easily. Instead of checking and going through the complete procedure of short selling, your agent will take care of everything for you.

5- Write a good hardship letter:

Many people try to play smart with the hardship letter to realize that their request has been denied by the lender. If you want to get your short sale approved by the bank, you need to be as honest as possible about the reasons that prevented you from paying the mortgage. If you lost your job, ill, experiencing divorce…etc, make sure to include these in your letter.

6- Get lender approval:

If everything is good, you’ll get a pre-approval of your short sale waiting to get final approval. When the bank decides that it’s good for both sides to short sell, then you’ll get notified with the final approval so you can proceed with the sale.

7- Close the sale:

After you get the final approval of the bank, you need to close the deal and sell the property. If you’ve done your home work before short selling the property, then you’ll never face any unwanted accidents.

In the last months or so, there has been a noticeable decline in short sale listing. The reason for that is that many short sales are being sold, which means that new homes are coming into the listings. Earlier this year, there have been a lot of short sale listings presented in the market. Because people seeking homes couldn’t resist buying good properties for much reduced prices, many of them have considered dealing with short sellers. Although even with a short sale reduced price home, Laguna Beach properties are still considered a little high in price. But if you manage to find a good short sale agent, you could end up paying around $400.000 for a good house.

So we can say that short sales are declining because of the demand they have created for home buyers. If you want to get a property for a much reduced price than what it actually worth, you need to consider seeing a professional real estate agent who is specialized in short sales.

Short sale taxes are simply taxes charged to the home owner after s(he) sells the property. The reason behind many short sellers falling into this trap is that many non qualified real estate or short sale agents don’t discuss short sale tax implications with their clients. Short sale taxes should be planned way before you short sell you property. Because as soon as the bank approves it and you complete the sale, the IRS will send you a 1099-C form on the amount forgiven by the lender. If you don’t know what the amount forgiven is. It’s the difference between your mortgage balance and the amount you sold the house by.

Let’s say that you have $200.000 on mortgage balance and you managed to sell the property at $150.000. The amount of lender’s losses will be in this case $50.000. Because the IRS considers the $50.000 as income for the short seller, it will be a subject of taxes.

How to avoid short sale tax implications?

In 2007, George Bush passed the Mortgage Forgiveness Debt Relief Act. Fortunately for you is that this act is viable until December 31, 2012. So if you want to benefit from this act, you definitely need to close the sale before this day. The other thing that you should also know is that the IRS eliminates forgiven debt taxes to up to $2 million ($1 million for couples who fill their returns separately).

Another way you could get rid of this tax is by talking to the lender (bank) into reclassifying your forgiven debt so it won’t be considered as an income for the IRS. Most banks will not agree this, but it won’t hurt if you just ask.

Being aware of the short sale tax implications, you could save yourself a lot of money and of course avoid any unpleasant accidents.

The best short sale definition

A short sale usually happens when a house sells for a lower price than the amount owed on the mortgage. It’s probably the best choice for home owners to avoid foreclosure. When a home owner can’t afford to pay the mortgage on the house, it would be better to sell the house at a lower price than its actual value just to avoid the foreclosure penalty. As in most cases many sides hold the mortgage, you would have to convince all of them if you want to get a short sale. While getting a short sale isn’t easy as it looks like, there are some things you need to consider.

If you’re asking why on earth would the bank holding the mortgage sells the house for a lower price, then you need to realize that there will be devastating consequences for them as well if you fall into foreclosure. Every bank usually has a special department which exclusively studies short sales and each one of them has its own rules and qualifications. If they find that your short sale deal is better for them then foreclosure, then they’ll approve it.

Many bad short sale agents don’t know what they’re doing and that can cause many problems to the home owner. Many of them think that all banks will clear your mortgage remaining balance. If you happen to get your short sale approved by the bank, you need to read the agreement whether you’re still responsible for the remaining balance or not.

So if you were confused about what a short selling is and why it’s sometimes needed, I hope that this short sale definition answered some of your questions.

The Freddie Mac program will take off August 1, 2010, but servicers can start using their initiative version right away.  Just like the HAFA we already know, servicers will have to offer homeowners a HAMP modification first and borrowers can receive up to $3000 in relocation assistance.

How are Freddie HAFA sales different from the standard program?

• Freddie’s program is the allowances to subordinate liens.  Each junior lien, in order of priority, may receive no more than 6% of their unpaid principal balance up to an aggregate cap of $6000,   in exchange for release of the subordinate liens and satisfaction of the underlying debts.  That means that if a home has 2 liens in subordinate position, one is a $210,000 HELOC recorded before a $2700 HOA lien, the HELOC will only get $6000 and the HOA nothing.
• Freddie Mac will accept the short-sale minimum acceptable net proceeds in satisfaction of the amount owed under the note and release of its lien
• Freddie Mac will not require promissory notes or cash contributions from the borrower by Subordinate lienholders must also agree to release all liens without promissory notes or contributions from the borrower in order for the borrower to close under the program.

Fannie Mae HAFA sales include greater incentives for the servicers, taking the max under the Treasury program at $1500 to $2,200.

In our loss mitigation office, we cringe when we hear the negotiator confirm the investor is Fannie and Freddie.  Their involvement has historically meant longer approval times.

The snails pace would make it hard to effectively market the property for a FMV retail buyer who would be willing to wait it out while their minimum net requirements would often dissuade investor offers.  The new HAFA initiatives may help speed up the process!  Thanks Fannie and Freddie.  See you down the road!

According to a Bank of America credit loss mititgation exec, they have failed to handle customers at the “standards Bank of America is accustomed to.”

That statement actually frightens me a little. Those of us in the short sale industry, prior to Equator and even now, know that Bank of America customer service is not pie in the sky.

According to reports, Bank of America has the lowest rate of successful permanent loan modifications under HAMP of the four largest banks.  [Four largest banks:  JPMorgan Chase @ 16%, Citibank @ 18%, and Wells Fargo @ 20%]

Bank of America keeps the same PR response of: we are training more people and making systems better….like use of the new Equator system for short sales.

According to the same exec – they are still receiving “more customer complaints than… are acceptable”.

The new program from BAC, their National Homeownership Retention Program, will help reduce the monthly mortgage payment to 31% of their monthly income for HAMP-eligible homeowners by first forbearing principal and ultimately forgiving it they stay current on payments.  The bank is targeting over 43,000 borrowers who they say are already eligible for their new program.