Great Short Sale News. You CAN Buy Another House.

Losing sleep over the precipitous drop in the value of your home? Wondering how you can continue to make payments on that $500,000 loan when the home now seems worth at most $300,000? Casting  jealous glances at the newcomers in your area who are getting bargain prices and bargain rates?

Guess what? Now you can short sell your home AND  buy another house at today’s prices and rates.

Over 14 million loans in the U.S. are now either underwater or in some stage of foreclosure. About half the nationwide sales to new buyers are either repossessions or short sales.  It seems to most underwater homeowners that there ought to be some way to connect the two–now there is. You can short sale your home and buy a similar property for half the price.

Lenders are  now coming out with new programs, many insured by FHA, which make it possible for homeowners to short sale their homes and simultaneously buy another property at today’s prices and today’s rates. Many homeowners have allowed their homes to go into foreclosure or waited helplessly for the loan modifications that never came simply because they couldn’t figure out where they were going to live if they left their homes. Some decided to stick out the school year. Others couldn’t bear to leave the neighborhood. Now they don’t have to.

Here are a few of the guidelines that will allow homeowners to short sale their current home and simultaneously purchase another home. First, they must be current on their mortgages. So, owners who have “let the property go” or who were not financially able would not qualify. Finally, here is some reward for those who have steadfastly made their payments in the face of dropping values.

Second, they must be able to qualify for the new mortgage.That means a FICO of at least 640 and income sufficient to pay for the new mortgage.That’s not as hard as it may seem. If a homeowner can pay the $500,000 mortgage at 6% or 7%, no matter with what great difficulty, think how easy it will be to pay the $300,000 with a 5% mortgage for an identical property.

Third, the buyer must have money sufficient to pay the minimum 3.5% FHA down payment and the accompanying  closing costs. The short seller will get no proceeds from the sale of his property. That’s a given. So, where will the money come from for the new property? If  it’s an FHA loan, the minimum down payment is 3.5% and that total amount can be a gift. Also, the short seller is eligible for the federal tax credit which goes up to $6500 for move-up buyers. That may be applied to the down payment or closing costs, but this is not yet determined.

Finally, some programs require that the new loan cannot be more than the previous loan. So, in this case the new loan cannot be more than the $500,000 which the  buyer was paying on the previous home. With the drop in prices today, in most markets, this will be an easy criterion to satisfy.

Impetus to do short sales just got much bigger. If you’ve been dithering about what to do and how to house the family after a short sale, these new loans could certainly aid in the decision-making process and give you peace of mind. Short selling your home and buying another one at today’s much lower values may, in fact, result in a significant improvement in your housing standards…

Loan Modifications: Obama’s Plan

Called the Home Ownership Stability Initiative the heart of Obama’s plan really is the loan modification. As we have all heard, some homeowners are facing payments jumping thousands of dollars a month as adjustable loans readjust. Many homeowners are paying 50% or 60% or more of their income in mortgage payments while the value of their proerties is tumbling.

This plan aims to modify loans for those who qualify at 31% of income. Notice, that just like refinances, modifications require income. That’s the first qualification: income sufficient to pay the modified mortgage.

Until now, banks have been reluctant to offer loan modifications to homeowners who, whatever struggles they were having, remained current on their mortgages. Most banks refused outright to help such borrowers. This plan changes that and makes loan mods available to those who are current in their home loans as well as those who are behind in their payments.

This is important because it allows those who have not missed a payment to maintain their credit. As we all know, often a few dings on the credit and a missed mortgage payment is a major ding, have a cascade effect. Credit card companies find out and jump up rates on credit card debt. It becomes much harder to get any credit at a decent rate, etc.

Let’s say, for instance, that the borrower is paying 43% of his income for his mortgage. He applies for a loan mod and the lender brings the payment down to 38% of his income. Then, the government [Freddie and Fannie] and the lender bring the loan down by equal contributions [3.5% and 3.5%] to 31% of the borrower’s income. That mod stays in place for 5 years. At the end of that time, the rate would be gradually increased to the rate at the time of the loan mod.

Also, and this is important, the government would reinburse the lenders who agree to bring down the principal. Bringing down the principal: all underwater borrowers’ dream and their lenders’ nightmare. Until now, it’s been the rare lender who would touch that principal.

Now, lenders have incentives. If they modify a current loan,servicers receive $500 and lenders [investors] $1500. Borrowers have incentives, too. Every year a borrower stays current in the new mod, he receives $1,000 for up to 5 years. This is clear incentive to help those “good” borrowers who have made tremendous efforts to pay their mortgages during this current crisis and by dint of great sacrifice maintain their credit. Obama’s plan clearly tries to help these people while at least partially answering the persistent critique that responsible homeowners received no help while the irresponsible were being bailed out. Obama’s plan specifically says speculators or flippers cannot particpate.

This, of course, brings up another issue: small investors who own rental properties, especially single family homes or condos, are suffering, too, but seem to be eliminated from this program. Apparently, that is the case except for rental property that was originally a principal residence. So, if you are renting out the condo or 2-bedroom house you bought as your first home before you bought your current residence, then you may be able to participate.

Final details of this plan are supposed to be released this week. The Treasury Department says it will issue clear guidelines for all lenders to follow in doing loan modifications. That would be a relief. At the moment, it’s a free-for-all out there. Some lenders are very cooperative; others refuse to do anything. There’s no doubt we need to do something even if it means helping those who have not, shall we say, been the most prudent in their financial choices. If we don’t the fallout is just too terrible to contemplate.

Homeowner Stability Initiative=Obama’s Housing Plan

We in these hard-hit states with many foreclosures [CA, FL, NV, AZ] have been waiting for this plan and now we have it. It’s not what we expected, at least not what I expected, but what creative ideas on how to handle the foreclosure crisis and not reward the foolhardy or the fraudulent.

The Obama Homeowner Plan has three distinct parts:

1. Help those who are CURRENT on their mortgages to refinance. They do NOT  need to show a hardship.

2. Help for those who are BEHIND on their mortgages get loan modifications. They DO  need a hardship, but that is broadly defined.

3. Help for HOME BUYERS by providing tax credits and low interest rates.

The main complaint that stable homeowners, especially those in areas, like ours, hit hard by foreclosure is that their tax payer dollars are going to “save” the imprudent, the insolvent and the extravagent. This plan tries mightily to avoid helping those kinds of borrowers. When introducing it, President Obama was very determined to point out that this does help even good payers who have never missed a payment. “Every foreclosure reduces neighboring home values around 9%,” he said, “and this will help prevent foreclosures.”

I do hope he is right. I do know that nationwide foreclosures are up 81%  over 2008 and 226% over 2006. This crisis hits about every state with the BIG FOUR, California, Nevada, Florida and Arizona, leading the plunge.  It’s also estimated that by 2012 8.1 million homes or 16% of all homes will be or have in foreclosure. That’s frightening.
foreclosure-next-exit

In sum, I don’t know whether this plan will work. I can see already that more people, even those upside down on their home value will be able to refinance as this plan makes it more palatable for the lenders. If they can’t refinance, they can get a loan mod more easily.  Failing those remedies, the plan even smooths the way for short sales which can take forever.

Loan Restructuring v. Loan Modification: What’s the Difference?

Cover for the first Zombie-Loan manga volume
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Mortgages and foreclosures, never popular topics, are dominating the news lately. Gradually, we are learning ways to halt or at least slow this onslaught of foreclosures ravaging neighborhoods and ruining lives.  One stop-loss method is loan modification. Typically, loan mods are for homeowners who are behind in their payments and are facing  foreclosure. In fact, I’ve even done a previous post about Loan Mod Myths.

Yet, loan mods do work. Here’s who will benefit from a loan mod:

Loan Modification Eligibility

  • Minimum of 12 months elapsed since loan origination date.

  • The mortgagor [homeowner]  most be delinquent (3 full payments due and unpaid) or more.

  • Default due to a verifiable loss of income or increase in living expenses.

  • The Loan Modification mortgage must remain in the first lien position.

  • Loan may not be in foreclosure when executed.

  • Owner occupant, committed to occupy property as primary residence.

  • Mortgagor has stabilized surplus income sufficient to support the Loan Modification mortgage.

  • Does not have another FHAinsured mortgage.

In some cases, the banks today will modify loans for those who are less than three months late. And, banks will modify investor-owned or non-owner occupied. Banks do require financial information, such as pay stubs and tax returns, but credit scores are not an issue.

What this all means is that you must have enough income to support the new payment. Banks will not modify your loan if you cannot show you have the income to sustain the new, lower, payment.

If you can’t show the income, then the best option for you is probably a short sale which will do less damage to your credit than a foreclosure and allow you to purchase another home within 2 years, provided, of course, you’ve paid your debts during these years and you can qualify for a loan.

What about those who are not behind in their payments?

For those current in their payments, Loan Restructuring , may be the answer. If you have not missed payments or perhaps find yourself owing more than your home is worth, you may be able to  redo your  loans without having to bear the cost of refinancing.

How is this possible?  Who is eligible for loan restructuring? Essentially, if you do not fall into any of the loan mod categories, then you may be eligible for a loan restructuring.

Loan Restructuring Criteria

  • Homeowner may be current in mortgage payments or  have missed a payment or two
  • Mortgagor does not have to reside in the property; investment property qualifies.
  • Mortgagor may receive a reduction in principal, interest and a cash refund.
  • No “Hardship” letter is required.
  • Existing income, debt, credit scores  do not matter.

A loan restructuring may enable you to reduce your principal, especially in areas where property values have fallen drastically and many owners are thinking of “walking away.” How exactly can this happen?

In seeking to restructure a loan, the homeowner re-examines the loan at the point when it was originated.  Attorneys or real estate brokers, like myself, working with attorneys search the documentation of the loan to see if it was  predatory in nature or, if not, if it  did not fully comply with federal Real Estate Settlement Procedures Act [RESPA] requirements. If a flaw is found,  the original loan is voided and restructured (not modified). This allows the homeowner or his representative  to negotiate with the lender from a position of strength. If the loan was “bad” from the beginning, why modify a loan to the advantage of the lender? Restructuring is clearly the best option for the homeowner.

If the loan is found to be predatory or in violation of RESPA, the homeowner may also be eligible for a refund of all or part of the original closing costs.


As we have all heard, banks packaged our mortgage loans into so-called “exotic” financial instruments and sold them all over the world. It’s these mortgage-backed securities and credit default swaps which are the original cause of our Current Recession. In their bottomless greed, banks sold and resold mortgages, slicing and dicing them into parts which they cannot now put back together. It is these mortgages which are great candidates for restructuring.

If you think you might qualify for a restructuring, call or email me and for a small fee we can find out. If your loan is not eligible for restructuring, the fee will be returned.

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Lower Your Mortgage Balance

Gradually, the government’s new programs aimed at mitigating the mortgage crisis are coming online. The latest one debuted October 1st.  It’s called Help for Homeowners, and it is for those who have FHA mortgages. Note: only FHA mortgage holders are eligible for this one. FHA [Federal Housing Authority] loans are generally for first-time buyers.

Help for Homeonwers–October 1st marked the release of FHA’s Help for Homeowners program.  This program allows homeowners who owe more than the value of their home to refinance into a 30-year-fixed loan.  The best part is that a client’s loan balance will be reduced to  90% of the current value.  So, if you owe $350,000 and the current value of your home is $300,000, your new loan will be $270,000. This is a very good deal.

Any excess will be required to be forgiven by the lender. In the above example, that would be $80,000 forgiven.  Further, the FHA eliminates any subordinate liens and gives the lender  a coupon.  What does the homeowner give the FHA in return? The homeowner agrees to share a percentage of the future appreciation with FHA.  FHA will use this appreciation equity when the home is sold to reimburse subordinate lienholders.

This is a fantastic program and will help many upside-down homeowners.  Here in Southern California this wonderful program may not offer much help, though, for several reasons.  Prices here were so high that FHA loan limits did not apply to most purchases. Also, so many easy-credit, no-money-down, stated-income loans were available that most borrowers bypassed the strict requirements of FHA. As a result, most SoCAl homeowners, newly-minted  in the last 3 to 5 years, would not have FHA loans.