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In today's troubled economy everyone is concerned about
how it may affect them. What started out as a real estate problem has quickly become an economic problem effecting everyone. Foreclosures
are at record levels and are hitting middle America hard. Bankruptcies have sky rocketed. Businesses are struggling
and jobs are being lost. In order to navigate through these troubled times, people have to have a basic understanding of the foreclosure, bankruptcy, short sale and loan modification processes. While you hope that you never need to use any of these options, the fact is, that there are many factors
that we have no control over that can totally turn our lives upside down. A business, failure, a job loss, a divorce
or any other factor that will force you to have to sell your home in a horrible real estate market that has seen the values
of our homes drop 40 to 60 percent. Central to everyone's concerns is their home. What if you lose income and can't afford their mortgage payment?
What if you have to sell because of an unexpected event - a divorce, an illness or a job transfer. We believe that everyone
needs to have a plan that centers around their home that has contingencies for the unexpected. A part of any plan is basic budgeting of expenses. While nobody runs a business without a budget, most people
we meet with no matter what their income level is have no budget. Becuase of this they do not really no where their
money is going and have never sat down to determine where they money should be going. As a pat of the budgeting process
you must determine that you have adequately protected yourself and your family. Do you have the right insurance?
Do you have an estate plan? How do you hold your assets? Have you saved enough money? Whether you are considering short sale, loan modification or bankruptcy for us to help you we would require that you
complete a Monthly Expense Information Form and an Asset/Liability Information Form. This helps us understand where your money is going so that we can better determine what the best option is for you
to proceed. Once the basic planing is completed, the money remaining can then be used
to invest. Depending on how much money is left a determination must be made as to how much risk you should and/or are
willing to take. We often run into the situation where people are not adequately protected and all of their investments
are in high risk areas. this is a recipe for disater. For more information on this you can review the Financial Building Block webpage. We work with respected, honest financial
planners to help you create a solid financial plan.
Unfortunately, since so many things affect and are affected
by your home situation, there are many scenario's that you must be prepared for that involve a number of different professionals.
It can be confusing and intimidating to even attempt to understand all of the various possibilities and who you need to consult
with to adequately protect yourself, your home and your family. The following boxes discuss some of the common situations
that people are facing or may face so you have a better understanding of what you may face. At the bottom of the page
we have definitions of some common foreclosure, short sale and loan modification terms that
you are likely to run into.
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With real estate
values falling 20 to 50 percent many homeowners have no equity in their home and, often are upside down. If you are
in this situation you need a plan to either protect your home or, if that is not possible, a plan to get rid of your debt
and started on a road to recovery that will result in you being able to get into a new home. If you sell your home when you owe more than
you can sell the property for you need to obtain the approval of each creditor on the property that you cannot fully payoff.
This is called a "Short Sale". Many people assume
that because the creditor approved the short sale that they also agreed to forgive the debt that could not be paid off upon
the sale of the home. This assumption is not correct. A short sale approval should be in writing and should address
whether the unpaid debt is forgiven or not and you should try to get the creditor to agree to how they will report the short
sale to the credit bureau. If there is more than one creditor on your property obtaining a short sale approval
is much more difficult to obtain. It is more difficult to obtain the short sale approval from the creditors who are
behind the first creditor because they generally are taking a much greater loss then the first creditor and their legal position
is different than the first creditor. When negotiating with the subsequent creditors you must realize that they will
be much more interested in your complete financial picture than will the first creditor. In order to effectively negotiate
with these creditors you must be familiar with creditor/debtor law and bankruptcy. In other words, if they sue you what
can you protect from collection and if you file bankruptcy what assets can you keep through the bankruptcy process.
Many people and companies will offer to negotiate your short sale but many are not knowledgeable about the numerous
legal issues that arise in a short sale situation. Numerous short sales have occurred where no written agreement was
obtained as to whether the creditor forgave the unpaid debt. Imagine the shock to those borrowers if they are sued for
the unpaid debt some time in the future! Many people negotiating short sales do not have a firm grasp of the legal issues
that may arise or that need to be addressed. If they cannot properly advise you as to what your options are if the creditor
sues you how can you determine whether the short sale approval that they will agree to is in your best interests? Only
a lawyer is qualified to address the numerous legal issues that need to be addressed. Of course, a lawyer is not qualified
to address many of the financial, real estate and tax issues that also may arise so in the end you are best served by having
a "team" of professionals that can help guide you through the process. In a normal short sale process you may have
to work with a financial planner, a real estate agent, a real estate attorney and, possibly, a bankruptcy attorney.
The No Home Equity Flow Chart diagrams out the various
professionals that can be utilized to deal with the various issues that can arise and the many different paths you may travel. |
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Foreclosure, Short Sale & Loan Modification Definitions
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Property owners today
are being bombarded with terms that they do not fully understand: What is a foreclosure? A foreclosure by action? What
is a Loan Modification? What is a Forebearance Agreement? What is the Period of Redemption? What makes it
even more confusing is that each state has different laws that may come into play and different terms for the same item.
When dealing with a lender you often are speaking to a person who has no knowledge of the laws of your state or the terminology
used in your state. In other words, you cannot rely on the lender to educate you but, instead, you must educate the lender! The following
are some common terms with their definition:
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Please complete the following
Asset/Liability form and Monthly Expense Form
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A loan modification is where the lender agrees
to modify the terms of their loan to the borrower. It can be a short term modification or it can be for the entire term
of the loan. The lender can adjust the interest on the loan, forgive past due payments or penalties, reduce principal
or the amortization period. How Do I Apply for a Loan Modification? The borrower or someone on their behalf must contact the lender to start the process. The lender
will require you to send them variuos financial documents and a hardship letter explaining why you need a loan modification.
You must provide the lender with all of the information and documentation that they require or you will not obtain the loan
modification. You can attempt to obtain the loan modification on your own, hire someone to do it for you or use a free
service. You should be very careful who you hire to negotiate a loan modification. Make sure that the company
negotiating the loan modifiaction is local. Many loan modifiaction companies are not local, charge outrageous fees and
have no accountability because they are not local. What Will Lenders
Modify? To date, lenders are not reducing the principal amount owed so if you get a loan modification your
property will still be upside down if you owe more than the property is worth. Lenders are more likely to reduce the
interest rate, give you a fixed interest rate instead of an adusable interest rate or amortize the loan over a longer period
of time (this will lower the monthly payment). When Will Lenders
Agree to Modify a Loan? The lender will not agree to a loan modification
if you do not have the income to pay the modified loan payment. The lender will not agree to the loan modification if
your income is sufficient to make the current monthly loan payment. In other words, you can't make too much or too little
or the lender will not agree to the loan modification. Is a Loan Modification
in Your Best Interest? The borrower must also determine if a loan modification is in their best interests. If the
borrowers property is upside down a loan modification will not solve that problem unless the lender agrees to lower the amount
owed which is very unlikely. If the borrower is underwater they must be prepared to stay in the property until the values
rise enough to wipe out the deficiency. Given the tremendous drop in property values many owners are going to be trapped
in their homes for a long period of time. A job relocation, a divorce, or many other factors may force a move and if
that move is before the values rise enough to wipe out the deficiency, the borrower is still going to have to go through a
short sale or foreclosure and suffer another hit to their credit. A Loan Modifications
Credit Impact A loan modification is generally not a way to avoid credit problems. A loan modification can lower
your credit rating up to 200 points. |
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Foreclosures have always
been around but the number of foreclosures that have taken place in the last 2 to 3 years has been staggering. RealtyTrak
reported that in June of 2009 over 300,000 homes in the U.S. received some type of foreclosure notice! This was a record
number since RealtyTrac started keeping track of this information in 2005. In the first half of 2009 RealtyTrac reports
that 1 in every 84 houses in the U.S. received a foreclosure notice! What is even more frightening is that many project
that foreclosures will not peak until 2014! While not everyone is going to face a foreclosure, we are all learning that there
are many factors that we do not control that can force us in to a foreclosure situation. Small business owners are struggling and
as their income falls, so does their ability to pay their mortgage. Illness can strike at any time and can leave you
in a financial mess. Layoffs and four day weeks are becoming more common place. Some of our largest employers
are going through bankruptcy. So while you may not ever have to face a foreclosure, everyone should understand that
something beyond their control may force them into a foreclosure situation. If you are not facing a foreclosure you
should be planning your finances to help avoid a future foreclosure or to put yourself in a better situation if one is forced
upon you. If you are facing a foreclosure you have to understand the process and how it may effect you. As soon
as you are in default, your lender can start a foreclosure. Normally, they will wait for about 3 months before they
start the foreclosure. Due to the immense number of foreclosures that lenders are dealing with, in some cases, they
do not start the foreclosure for many months after the first default. Once the foreclosure by advertisement is started, it takes about
three months to get to the Sheriff's Sale. Recently, we have begun
to see lenders voluntarily postpone a scheduled Sheriff's Sale for no apparent reason. Prior to the Sheriff's Sale the borrower
can cure the default by paying the past due amount and certain costs set out in the statutes. If cured before the Sheriff's
Sale, the foreclosure is terminated. Once the Sheriff's Sale has been held, the mortgage is gone and the borrower must
pay the amount bid at the Sheriff's Sale plus some costs to stop the foreclosure. After the Sheriff's Sale, there is
a Period of Redemption in which the borrower has
the right to continue to occupy the property and can stop the foreclosure by paying off the amount bid at the Sheriff's Sale
and some miscellaneous costs. The most common period of redemption is for six months but in some situations are shorter
or longer or can be changed by the lender after obtaining an order of from the District court. Once the Period of Redemption
expires without the borrower paying off the holder of the Sheriff's Certificate, the borrower has lost the property.
If you would like to see the time
frame for various types of foreclosures in Minnesota, click the following link.
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