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When you become delinquent with your payments both you and the lender are distressed.   Remember they are in the business of making loans and are not in the business of repossessing properties.  When a borrower defaults, the loan becomes a nonperforming asset, at which time it is no longer earning interest.  If the loan is not earning interest, it is not producing income for the lender.

This is bad for the lender.

In addition to not generating interest income, nonperforming loans actually cost the lender more money because of the lost earning power of the assets and the legal and administrative costs associated with collecting the loan or repossessing the property.

Example:  (If the lender has a $200,000 nonperforming asset, then they are required to keep 6 to 8 times that amount in reserves which is $1,200,000 to $1,600,000.)  Therefore if the lender would take a discount of $160,000 for the $200,000 loan, it allows them to put back into circulation the $1,200,000/$1,600,000 allowing them to collect interest making up for the $40,000 short sale that they took on the $200,000 loan.

A study conducted in 2002 by Craig Focardi of the Tower Group estimated the entire costs of a foreclosure to the lender was $58,759 and took 18 months. You can understand why the loss of a short sale is less than the cost of foreclosure.

(Copyright © 2007 By Dan Forbes, All Rights Reserved.)

Many Bradenton, Florida homeowners are struggling with mortgage payments.  Some are faced with the threat of foreclosure.

What exactly is a foreclosure?
A Foreclosure occurs when the Borrower falls behind with their payments and the Lender takes legal action against them in order to seize the property.

Here is the wekipedia definition:
Foreclosure is the equitable proceeding in which a bank or other secured creditor sells or repossesses a parcel of real property (immovable property) due to the owner’s failure to comply with an agreement between the lender and borrower called a “mortgage” or “deed of trust.” Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a lien on the property. When the process is complete, it is typically said that “the lender has foreclosed its mortgage or lien.”

The foreclosure process begins when a borrower defaults on their loan payments and the lender files a public default notice, called a Notice of Default or Lis Pendens. The foreclosure process can end one of four ways:

1. The borrower reinstates the loan by paying off the default amount to during a grace period determined by state law. This grace period is also known as pre-foreclosure.
2. The borrower sells the property to a third party during the pre-foreclosure period. The sale allows the borrower/owner to pay off the loan and avoid having a foreclosure on his or her credit history. A short sale may occur.
3. A third party buys the property at a public auction at the end of the pre-foreclosure period.
4. The lender takes ownership of the property, usually with the intent to re-sell it on the open market. The lender can take ownership either through an agreement with the borrower/owner during pre-foreclosure or by buying back the property at the public auction. These are also known as bank-owned or REO properties (Real Estate Owned by the lender).

What happens to your credit with each of these four possibilities:

1. Outcome number one. Your credit might suffer a little for the late payments you incurred.  But, this is the least damaging option.
2. Outcome number two.  If you can sell the home and pay off the loan in full, this is the absolute best option.  There is no damage to your credit.  If you can’t pay the loan in full and complete a short sale, your credit will suffer a little, but at least you won’t face the devestating impact of foreclosure.
3. Outcome number three. Your credit is ruined and it is years before you can buy another home.
4. Outcome number four.  Your credit is ruined and it is years before you can buy another home.

(Copyright © 2007 By Dan Forbes, All Rights Reserved.)

There are actually hundreds of steps to successfully completing a short sale. But, you probably wouldn’t read this article if I covered that many steps. So, let’s boil it all down to 5 simple steps.

1. List your home with a short sale expert.
Your lender is going to require that your home be listed. Be sure to list with a Realtor who specializes in short sales.  This isn’t the time to list with a friend or even a relative.  Short sales are too complicated for the inexperienced agent.

I work in the Bradenton - Sarasota, Florida market, but the short sale process is the same nationwide. Know that it takes an incredible amount of time, effort, and expertise to negotiate with the lender and get the job done. If you need help finding an expert in your area, please contact me, I can help.

2. I will market the home and find a buyer for your property.
Without a buyer there is no short sale.  You will want to price the home agressively below your competition to attract a buyer in a short amount of time.  Remember, time is working against you and that your goal is to be relieved of the debt.  Don’t make the mistake of pricing the home as you normally would.  Be very, very aggressive with the price. This is where your Realtor can offer expert guidance.

3. I will help you prepare the short sale package which is submitted to your lender.
Once a buyer is found and the contract is executed, it’s time to submit the “short sale package” to the lender. The documents to be included in this package are described a little later.  Right now, just understand that until a buyer is found, there isn’t much to do.  However, it is important to gather all the documentation that will be required.  I will provide you with a list of the required documentation.

4. Your lender will order an appraisal or Broker’s Price Opinion (BPO).
The BPO is conducted by a real estate agent hired by your lender. It will most likely be a drive-by BPO unless the condition of the property warrants an interior inspection.  The purpose of the BPO is to determine the property’s fair market value. This will be the pivot point for the lender’s negotiation regardless of the purchase price on your contract.

5. Your lender either approves, rejects, or counter’s the buyer’s offer.
Most of the time you can expect the lender to make a counter offer.  I will negotiate between your lender and the buyer. The buyer will decide whether to accept the lender’s offer, reject it, or make a counter offer back to the lender.  Just remember, the lender has the final say and must approval the sale.

This process can take a week, a month, or several months depending upon many factors.  It’s important for all parties to know that this is a lengthy process and that patience is a virtue.

(Copyright © 2007 By Dan Forbes, All Rights Reserved.)

If you are struggling with your mortage payments and owe more than your home is worth, a short sale may be your best solution.  A short sale occurs when the lender agrees to accept less than the full mortage balance, rather than take the home back in foreclosure.

To find out if you might qualify for a short sale it is best to speak with a short sale expert, like myself.  Here are some qualifying factors to consider.

1. If you cannot sell the home without going into “the red”, your situation may qualify for a short sale.  Take the sale price of the home and subtract all of the selling expenses like the Realtor’s commission, transfer tax, liens, HOA dues, etc. If the resulting number means you would have to bring money to closing, you may qualify for a short sale.

2. If you do not have enough income to make your mortgage payments, you may qualify for a short sale.Perhaps your financial situation has changed and you are unable to pay all of your bills, including your mortage. You may qualify for a short sale.

3. If you have depleted your savings, you may qualify for a short sale. You see, even if your income has dropped, if you have a lot of money in savings, the lender will expect you to make your mortgage payments. If you can show that your savings are depleted, you may qualify.

4. If you can pass the lender’s hardship test, you may qualify for a short sale.  There are certain hardships that the lender will consider to qualify you for a short sale.  Among those hardships are:

• Bad health for you or a family member that has caused severe financial hardship.
• Death of a spouse which has resulted in financial hardship.
• Divorce which has caused a reduction of income.
• Being called to active military duty which has reduced your income.
• A job transfer which moves you out of the area and then you cannot sell or rent your home.
• A disabling injury which prohibits you from working.
• You have lost your job and cannot find another.
• You are financially insolvent with liabilities outweighing your assets. You simply do not have the ability to pay your mortgage.

(Copyright © 2007 By Dan Forbes, All Rights Reserved.)

Many Bradenton, Florida homeowners are struggling with mortgage payments and financial troubles. Some are facing foreclosure which can be devastating to your credit and your emotions.

If you are fearful of foreclosure it’s important to know that you really do have options.  Here are 10 options to consider.

1. Get in contact with your lender: Bradenton homeowners facing financial difficulties often make the mistake of avoiding their lender, which is exactly the wrong thing to do.  What should you do? Contact your lender as soon as possible and explain your situation.  Let them know that you value your good credit and ask for their help. See what options they have to offer.

2. Turn to family members and friends: Don’t let pride stand in the way of asking for help from your family and friends. Think of it this way, if you were in a position to assist a family member or friend who was facing a similar situation, how would you feel if they didn’t ask you for help? Sometimes, just a little help can make a big difference.

3. It is possible to reinstate the mortgage: Reinstating the mortgage is when you catch up the delinquent payments. For example, if you expect your financial situation to improve in the near future you may ask the lender to work with you through this temporary set back. If you can come up with enough cash to bring mortgage payments up to date, the lender will probably agree to hold off on foreclosure proceedings. This is commonly called a “work out agreement.”

4. Seek a forbearance agreement with the lender: Forbearance allows payments to stop temporarily or be reduced for a specific length of time. The lender may grant forbearance of principal, interest or both. You will be responsible for repayment of the interest that accrues. Sometimes the borrower can make interest-only payments, or the interest will be added on to the principal. The key is to contact your lender right away. Even if you think it is too late, it’s never too late to ask!

5. Refinance the loan and consolidate your debt: With a good credit score and history, you may be able to consolidate your debt with a loan that actually lowers your total monthly payment to less than you’re paying on all your other loans put together. Be careful with this approach because you may only be making matters worse.  Lenders will not accept a short sale when the loan is less than one year old.

6. Sell the home: If you have equity in your home, consider selling the home, paying off the loan, and finding more affordable accommodations. Selling the home is what 90 percent of those who are facing fincancial hardship really need to do, but unless you act quickly, you may run out of time. Of course, if you owe more than the home is worth, only a short sale can help you.

7. Negotiate a short sale: Lenders typically want to avoid foreclosing, because of the costs associated with it. Most lenders are open to accepting a short-pay on the loan if you can prove financial hardship. This isn’t something you should attempt alone.  Talk with a knowledgeable Bradenton Realtor. Your lender is going to require that your home be listed with a Realtor.

8. Give a deed in lieu of foreclosure: You may be able to offer the lender the deed in exchange for them not foreclosing on you. You lose the house and your equity, but it’s not as damaging to your credit as a foreclosure. In a market with declining values it is unlikely that the lender will accept a deed in lieu of foreclosure.

9. File for bankruptcy: Bankruptcy is rarely the best choice. In most cases, it simply buys you some time, but it does not stop foreclosure. Bankruptcy is disasterous to your credit and is costly.  If you are thinking of filing bankruptcy you should seek legal counsel.

10. Foreclosure: This is, by far, the worst option. With foreclosure you lose your home, lose your credit rating, and any equity you may have built up. After foreclosure you will probably not be able to buy another home for years to come and your credit will be ruined for years. You may also face a deficiency judgment. This is when you still owe what the lender lost.

Many Bradenton borrowers do nothing and end up in foreclosure or bankruptcy. The number one mistake of most people is denial. If you wait too long you will lose the opportunity to salvage your financial situation. You should know that doing nothing is not an option. Don’t wait until it is too late to be helped.

Is a Short Sale My Best Option?

If your financial situation is unlikely to improve in six to twelve months, a short sale may be your best option. The worse case senario is that the lender will give you a 1099 for the amount of debt forgiven.  You may owe income tax on this amount.  You will want to talk to your accountant to find out if you qualify for “insolvency” which will eliminate any tax due.  Insolvency is when your liabilities (what you owe) are larger than your assets (what you own).

None of the above should be considered legal or tax advice.  Always,  consult appropriate professionals.

(Copyright © 2007 By Dan Forbes, All Rights Reserved.)