What is a Loan Modification?

This is an agreement between a mortgage holder and a borrower that lays out a specific loan payment plan and puts a stop to the foreclosure action as long as the borrower meets the new terms of the agreement. The payment plan often includes provisions for lowering the interest rate (temporarily or for the remaining life of the loan), lengthening the term of the loan, and on rare occasions, principal reduction. Any late payments are usually added to the “back” of the loan which effectively lengthens the life of the loan.  Most lenders will offer modifications under the HAMP program and also offer additional internal programs for those that do not qualify for this program.

What is a Forbearance Agreement?

A Forbearance Agreement is a written agreement with your mortgage company in which you arrange to keep your home. The agreement will normally include two primary elements:

  • The borrower’s promise to remain current on the mortgage going forward.
  • Some plan for making up the delinquent interest and other charges. It may mean making additional payments to the mortgage company, or the delinquent amount could be added to the loan to be paid later. All the terms of the original note typically remain the same.

What is a short sale?

A short sale is an agreement with the lender(s) to accept less than the amount owed by a borrower by “short selling”  the property to a non-related third party. When a borrower is faced with a hardship, has fallen behind (or is likely to fall behind) in the mortgage payments, and the home cannot be sold for the amount owed to the lender(s), a short sale agreement may be an alternative for distressed homeowners. We negotiate with the lender(s) to accept a payoff of an amount allowable by the market conditions. Lender(s) then receive the complete proceeds of the sale and generally discharges the remaining debt.

What is a Foreclosure?

It is the legal process for which a lender, or lien holder, uses to recover their investment. In California, the typical process involves the lender issuing a “Notice of Default” after you have gone three months late in paying your mortgage. After the Notice of Default has been issued, the lender must wait another 90 days to give the homeowner a chance to bring the loan current; this is known as the redemption period. After those 90 days, the lender can schedule for an auction in twenty-one days on the county courthouse steps; this type of a foreclosure is known as a Trustee Sale.

Why would a lender agree to accept less than what is owed?

Whether the lender chooses to go through with a foreclosure, or agrees to a short sale, they are taking a loss. A short sale gives the lender the ability to cut its losses upfront and avoid a potentially greater loss from the expense, and time, of a foreclosure. They are not in the business of owning and managing properties, and they do not want to pay the holding costs of keeping the property maintained, keeping the utilities on, making repairs, and paying the administrative costs attached to these activities. A successful Short Sale prevents the lender from paying these additional costs thus reducing their loss even further.

Additionally, lenders must increase their Reserve Requirement for all delinquent and non-performing loans – lenders must set aside funds in reserve to deal with potential losses. These funds cannot be put to work generating new loan fess until the bad loans are resolved. A successful Short Sale lets the lender put more money to work.

Do lenders approve all Short Sales?

In a word, no. That is why it is critical to work with someone that has extensive experience at getting Short Sales approved. From the presentation of the Short Sale package to the lender, to working with lender’s Loss Mitigation Department, we know how to keep the file moving towards approval. The first step is to get pre-qualified for a Short Sale. There is no charge for this.

My income problem was only temporary. Do I need to sell my home?

You may be able to keep your home. You will need to convince your mortgage company of two things:

  1. The problem that caused the mortgage payment disruption was beyond your control – Some examples include illness, injury, temporary disability, or forced job change.
  2. You are now solidly in a position to stay current on your mortgage payments and make some progress towards making up the delinquent amount.

Do I qualify for a short sale?

To qualify for a short sale, you must be able to prove to your lender(s) that you are a victim of a “hardship,” and therefore, unable to continue making payments on your mortgage. Qualifying for a short sale is dependent on individual circumstances. If you answer “yes” to the following questions, you may be a good candidate for a short sale:

  • Have you experienced an unforeseen hardship since you obtained financing for your property?
  • Do you owe more on your property than the amount your home could sell for in the marketplace today?
  • Do you have significant difficulty in making your monthly mortgage payment?

What are some examples of “hardship”?

A hardship situation is one that is the result of some extenuating circumstance that leaves the borrower unable to afford their mortgage payments. While each situation varies, some frequent examples of hardship include:

  • Divorce or Separation
  • Family illness or injury, or medical bills
  • Illness or injury in the extended family – particularly if it forces relocation
  • Job Loss or reduction of income
  • Job relocation
  • Death of spouse or wage earner
  • Adjustment in Mortgage payments
  • Increase in unexpected living expenses
  • Failure of Business

The above list is not necessarily inclusive of all circumstances that a lender may consider as a hardship. If you have any questions about a hardship, please feel free to contact us.

I have two loans, can I still do a Short Sale?

Yes. We can work with both lenders to put together a Short Sale transaction (many times the same lender holds the 1st and 2nd loans). Even if the value of your home is below the balance of the 1st mortgage, we can normally get the two lenders to cooperate. In the end, neither lender wants to own another home through foreclosure.

I am current on my mortgage, will my lender consider a Short Sale?

The answer is, maybe. Some lenders will accept a Short Sale file for approval on loans that are not delinquent. Other lenders will not accept the file until the loan is delinquent. We can put your Short Sale file together within a couple of days and submit it for approval. (Remember, there is no charge for this). That is the best way to determine if your lender will accept a file for approval on a loan that is current.

Can I simply deed my property to someone else and avoid the hassle?

Deeding your property to someone without paying off the loan is nearly always a bad idea. In the first place, the lender still considers you primarily responsible for repayment of the loan. If the loan payments do not get paid, or if the lender ultimately forecloses, this will show on your credit report. Secondly, when you deed your property to someone else, you give up control of the property. Along with the deed goes the ability to control the property. Do not deed your property to someone without paying off the loan unless you have consulted with an attorney.

Typically, how long does a short sale take?

All short sale situations are unique and follow their own timeline, but a general estimate is 2-4 months. Many variables are associated with the timeframe:

  • How quickly an offer is generated and accepted by the seller
  • How quickly the lender responds to the offer (dependent on the quantity of other short sales the lender is processing)
  • How many lien holders need to provide approval

Is a short sale right for me?

If you are faced with a hardship that makes it likely you will be unable to meet your obligation on your mortgage, your lender would prefer to settle the matter with you as opposed to taking the property through foreclosure. You need to decide which option (refinance, loan modification, deed-in-lieu, short sale, foreclosure, and bankruptcy) is best for you and your family. By weighing the pros and cons of each, often the short sale is the best option.

When should I begin the short sale process?

Time is of the essence! Short sale situations tend to be time sensitive; the sooner we are able to begin negotiating, the greater the chances of a successful resolution. If you foresee trouble in making your monthly mortgage payment, you should begin considering your options. The best time to begin the short sale process is before you miss your first payment to allow more time for lender approval; there is no need to wait until the lender sends you a notice of default or initiates formal foreclosure proceedings. If a Notice of Default has been filed or a Trustee Sale has been set, contact us as soon as possible. It is not uncommon for a lender to postpone a Trustee Sale when presented with a pending offer.

If I do a short sale, how much will it cost?

Nothing. It’s true, in most cases you will pay literally no sales costs if the lender approves the Short Sale. All commissions, title and escrow fees, and even most repair expenses are paid by the lender as part of the Short Sale approval. We will include the following clause in the contract, “Seller’s agreement to sell is subject to approval by existing lender of Short Sale property at no cost to Seller. Seller shall not be required to deposit funds to close escrow.” Remember, lenders approve Short Sales and accept the resulting loss in an effort to avoid larger losses through foreclosure.

Do I have to move out of my home?

If you lender(s) approve a short sale, you may not need to vacate your home until it closes escrow; sometimes, the lender agrees to let the new owner rent the property back to you.

Will I have to pay the deficiency back to the bank?

The real benefit to a Negotiated Short Sale is securing an approval from the bank relinquishing their right to pursue a deficiency. In a foreclosure, whichever bank chooses the trustee sale, relinquishes their right to pursue a deficiency. If you have a second mortgage, and the first lender forecloses, the second lender still possesses the right to seek a deficiency judgment against you. In a short sale, often the negotiator can negotiate with the second lender to waive their deficiency rights. Although we have some resources available, we are not legal advisors so a homeowner should always seek professional legal advice.

My property is in rough shape and needs work, can I still do a Short Sale?

Absolutely. In fact, lenders are more motivated to do a Short Sale on a property that needs work than on a property that doesn’t. The lender knows the risk of a loss goes way up when they foreclose on a property that needs lots of work. Aside from the expense of completing the work, lenders are simply not set up to get the work done. They are in the loan business, not the fix-it business.

How will a short sale affect my credit?

The greatest impact on your credit is the number of missed or late payments. In a short sale, you can decide how many payments you miss. In a foreclosure, the banks decide when they will foreclose which means you have no control over the number of late payments. It is often reported that each late payment results in a 35 to 50 point drop in your credit score. We have seen some client credit scores only drop 100 points after a Short Sale. In fact, the act of a Short Sale is not specifically addressed on your credit report; typically your report will state “Settled for less than owed,” “Settled,” “Charged off,” “Paid as negotiated,” and “Paid,” In a foreclosure, your credit score will typically drop 200 – 300 points, and FORECLOSED will be on your credit report for 7 years.

What are the tax ramifications of a short sale?

In December 2007 the Mortgage Forgiveness Debt Relief Act was signed into law by President Bush. This law, which is approved through December 2012, eliminates potential tax liability on “Qualified Principal Residence Indebtedness” associated with loan modifications, short sales, and foreclosures, on primary residences. In addition, there is relief for those who are insolvent. Although we have some resources available, we are not tax advisors; a homeowner should always seek professional tax advice.

When can I qualify to buy another home after a short sale?

Because a Short Sale is looked more favorably upon than a foreclosure, you can re-enter the housing market in as little as two years. There are also companies that can correct your credit sooner.

How do I get started?

It’s easy. Call to set up an appointment and we will pre-qualify you for the short sale process. If you later decide you don’t want to do a short sale, that is okay too, at least you will know your options.

Call Me Today 

Frank Verni

Broker / Realtor

Quest Realty

Email: [email protected]


DRE # 01390255

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