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Loss Mitigation options to stay out of foreclosure

Posted on: 09th Apr, 2004 12:24 am
if you are behind on your payments and facing foreclosure, you may need loss mitigation help. loss mitigation options (forbearance, loan modification, etc) help a borrower avoid foreclosure by providing them with alternatives to pay down their mortgage. it also minimizes the lender's credit loss resulting from the borrower's inability to repay the loan.

how do i negotiate for loss mitigation?

here's an overview of what you should do when you cannot keep up with your usual payments, how to negotiate with the lender, and what actually happens when you are considered for a loss mitigation/loan workout plan.

contact the lender: unless you've missed a few payments, some lenders will not negotiate with you for a workout plan. however, if the lender refuses to negotiate unless you're behind, you should keep trying. contact the lender's loss mitigation department and request a loan workout option to help you pay down the mortgage.

hardship letter: prepare a hardship letter including the specific date when the hardship started. take a look at this sample hardship letter. you should attach documents supporting your hardship claim. learn more on how to write a hardship letter.

lender's analysis of your loan: after the lender has agreed to discuss a loan modification, they will send you a packet of forms. they will want you to provide as much information as you can about your finances so they can evaluate your situation using their own calculations. the types of information they are looking for include:
  • 2 months of bank statements
  • tax filings for past 2 years
  • receipts of 4 months of regular monthly payments
  • personal statement about your finances
  • situation that made you delinquent
  • paystubs for past 2 months (to check for current ability to pay off loan)
  • name and contact details of borrower's current employer
  • for self-employed persons, last 2 years of tax information and year-to-date and profit and loss business statement for past 2 years
  • recent utility bill
the lender reviews the above information, calculates how much you can afford to pay each month and calculates:
  • monthly net income for past 2 years (adjusted to changes in income)
  • monthly living expenses (under normal conditions) with debt payments (adjustments are made to reflect rise or fall in expenses for each of the first 3 months of the loss mitigation option)
  • surplus income available each month by deducting expenses from income
  • surplus income percentage by diving surplus income by total monthly expense
based on the above calculations, the lender will approve you for a loan modification and make you an offer. if you cannot afford this offer, you should try to get help from a credit counselor who will be able to help you negotiate. before sending any documents to the lender, you should make copies in case the documents are misplaced.

what are the loss mitigation options?

here's a rundown of the workout options available to you in order to avoid a foreclosure.

special forbearance

repayment plan for the borrower to cover the debt and get current on loan until you can make the usual payments through a structured payment plan or loan modification.
  • suffered verified loss in income and living expenses have gone up, but has enough to cover the debt and become current on the loan.
  • occupies the property as primary residence.

delinquent for 3 months but not more than 12 months.

property should not need repairs which may affect payment under forbearance.

loan modification

permanent change in terms of the loan - the debt is included in the loan balance and reamortized at a reduced interest rate.
  • suffered verified loss in income or increase in living expenses but have stable surplus income to help pay at the modified rate and terms.
  • borrower should remain as the occupant and property should be the primary residence.
  • borrower having loan at above market rates, lower loan-to-value ratio, and mature terms (loan paid down for 10 years or more).
  • someone who isn't delinquent but may soon default on the loan.

behind on payments for 3 months or more and 1 year has passed since the loan was signed.

property should be in good physical condition; otherwise costs to complete repair work will drain out enough cash and borrower won't be able to make payments under the modification.

short sale/ pre-foreclosure sale

sell off property to pay off the debt, though property value has declined to less than the money owed. know more…
  • have a verified loss in income.
  • having negative equity of not more than approx. 63% of the unpaid loan balance.
  • occupies property as the primary residence.
  • non-occupant may qualify but have to prove that the need to vacate is related to default.

one who is already behind on payments or likely to be behind soon.

no serious damage to property. even if damaged, cost of repair should not exceed 10% of the repaired appraised value.

property should be able to be sold free and clear of liens.

deed-in-lieu of foreclosure

borrower offers property to lender who sells it off to retrieve the unpaid balance. learn more…
  • one who's unable to continue making payments.
  • occupies property as their primary residence.
  • non-occupant owner can qualify, but he has to prove that the need to vacate is related to the cause of default.

the loan is in default (that is, the borrower is more than 30 days late on their payments and the cause of the default cannot be eliminated).

property should be free of any liens.

property shouldn't have been used as rental property for more than 1 year.

partial claim

placing your past debts into a subordinate 2nd mortgage (not exceeding 12 months of piti) payable to hud (2nd loan payment to begin only after first mortgage is paid down; there's no interest on the 2nd loan).
  • those having fha loans and mortgages offered by freddie mac approved lenders.
  • unable to qualify for forbearance.
  • use property as the primary residence.
  • can prove that financial hardship is over.
  • may qualify even after bankruptcy filing but court approval required.

delinquent for 4 months but not more than 12 months.

property should be in good physical condition.
*n.b: the criteria and conditions stated in the table above may vary from one lender/mortgage company to another.

of all the loss mitigation options, special forbearance is the best. it may be combined with loan modification when there's doubt about the borrower's income stability. especially in these tough economic times, if you're unable to get a loan modification, your lender may be open to a short sale or a deed-in-lieu to avoid foreclosure. if you convince your lender to accept a deed-in-lieu you can even talk to the lender about rental options. whichever option you decide is best to help you avoid foreclosure, you'll need to submit the same documents to prove your hardship.

related readings
welcome mnp,

i suppose you should re-negotiate for a refinance of the negative amortization loan. this is because it'll get worse if you're not able to make payments and reduce the balance. it's better to refinance into a fixed rate mortgage.

as far as chapter 13 is concerned, that's a good option and not as hard hitting as chapter 7. but you don't need to keep paying for 40 to 50 years or so. it's a matter of 3-5 years within which you'll have to pay the entire or part of your debt according to a payment plan approved by a bankruptcy trustee. just take a look at the information available on chapter 13 bankruptcy.

keep updating the community with what the lender says about the refinance. there are experts participating in the forums. hopefully they'll be able to come up with more advice.
Posted on: 19th Nov, 2008 09:04 pm
Thanks adonis for relocating my post in all these forums.
We're scheduled to sit with the most trustworthy mortgage broker we know tomorrow. He's not from the same company, so I'm not sure what he can do, but he didn't say "Sorry can't help ya" so we'll see.
I wish banks actually acted liked they cared a little. If we go to foreclosure, they get to sell the house for current market value. If they'd agree to something less then what they shoehorned us into, we'd go for that. Maybe we can get somewhere with the re-negotiate, but they don't sound helpful. We seem to be talking to a bank now based on India (not just the helpdesk, but the whole bank).
I'll chat with him also about the Ch13 idea, but he might not be the guy to advise on that. Not something I ever "planned" on doing, but I suppose most people would say the same.
Thanks again, and I'll re-post as things progress.
Posted on: 20th Nov, 2008 09:22 am
Hi Mnp,

Welcome back.

I feel chapter 13 would be a better option compared to foreclosure. At least it won't affect your credit as bad as foreclosure. I understand you haven't though of it. But it's an option worth considering.

Regarding the broker, I'd like to ask whether you're looking for a refinance loan in order to get out of the negative amortization loan.

May god bless you.

Samantha
Posted on: 24th Nov, 2008 04:01 am
I was severed from my company on 08.08.08. I have not found a job yet. I started my own business though, but it is slow. Was making 80K and paying a 15 year mortgage. Now my unemployment pays only 1/2 of my payment. I had a severance that lasted until Dec. Now I have started to live on credit cards but I have money in a 401k about 111K. I have a loan in my 401K too (not including that amount) People tell me not to cash it in because of the tax hit, but I will have to do it if I do not get a job soon or lose the condo. Condo is on the market, dropped price 2 times. not one person came by. The realtor wanted to short sale in the 1st month. I did not think I should rush, I have not been late on a payment yet. I filled out the HOPE now america form to let the bank know the situation.Bank said I could not pay for three months, but then the entire payment would be due at the end of that, so did not seem helpful and I Decided to pay through 2008 and talk to them about 2009, just in case I found a job or if some legislation was passed due to new president.

Should I should take the place off the market because it would affect me qualifying for a loan or keep it on until I have a job? Should I cash in my 401K to keep the place or should I go to short sale or do Deed in Lieu of Forclosure. I do not want to lose my credit after years of hard work to keep it. Seems sad to lose everything over one big change in life. But I guess it happens. But I have a lot of determination to prevent the lose if there is away around it.

Do not want to go into foreclosure, but want to maintain my credit hope I find a job. I have to do something in the next 3 months, but I do need a place to live and its cold in Chicago in the winter. I do not know if I should file bankruptcy, it seem extreme. Any advice is appreciated. Thanks Cold in Chicago
Posted on: 11th Dec, 2008 06:43 pm
Hi COLD IN CHICAGO

You can take a loan from the 401k but you should remember that this is your retirement account which will pay you benefits after you retire. So in my opinion it will not be a very good option for you. However if you really face problems in paying the mortgage, then you can go for it.

Short sale and deed in lieu will both affect your credit. However, a short sale will lower your credit by 75-100 points whereas a deed in lieu will lower it by 250 points. But you can also speak to lender for a loan modification or a forbearance. You can also check out the following link to know more:
http://www.mortgagefit.com/foreclosure/17ways-avoid.html

Thanks.
Posted on: 12th Dec, 2008 12:42 am
our property taxes has increased.. and we recieved a letter from countywide stating that our mortage will increase due to the property taxes and now our mortage will jump from 1000 to 1500. Is there anyway we can get an extention on the property taxes to 24 months instead of 12
Posted on: 13th Dec, 2008 01:33 pm
Hi,

As far as I know, extension period on property taxes may vary from county to county. You should check with your county to determine whether you may be eligible for an extension on the property taxes.

Thanks.
Posted on: 15th Dec, 2008 01:02 am
Is California one of the states that doesn't allow the lender to after the owner's assets once a home has gone into foreclosure?
Posted on: 22nd Dec, 2008 07:37 am
Welcome Sammy,

As far as I know, California is an anti deficiency state wherein the laws does not allow the lender to go after the borrower for the deficient amount resulting from the sale of the property.
Posted on: 22nd Dec, 2008 11:37 pm
A friend's ex-wife is currently letting their old house go into foreclosure. Unfortunately, the friend's name is still on the loan and title. To add insult to injury we just found out the ex's new hubby is a dead beat dad and has a child support lien on the house even though his name is not on anything (separate issue). If there is a way to get that corrected (big if), can the friend avoid taking a hit on his credit? For instance, would a quitclaim deed do the trick at this point in time or is it too late? Maybe he can go to the lender?
Posted on: 25th Dec, 2008 09:09 pm
I have two lenders, one is 80% other is 20%. My question is, if I go with the lieu of foreclosure, short sale or any other process, what can I do, how to talk with boht of them. I am confious, please give an advice.
Posted on: 26th Dec, 2008 11:14 am
Hi!

Welcome to forums!

To waltkat!

Signing a quitclaim deed now will be considered as a fraudulent transfer. The lender may penalize your friend for doing so. Your friend can speak to the lender and see if there is anything that the lender can do for him. But as far as I know, your friend's credit will be badly affected as his name is on the mortgage of the property.

To matti!

You can speak to the first lender about a deed in lieu foreclosure.You will have to write a hardship letter to the lender for this. The lender will then sell of the property and recover his dues. If there is an excess amount, then you can use it to pay the 2nd lender. Or else the 2nd lender may charge off the mortgage to a collection agency who will in turn collect the dues from you.

Feel free to ask if you have further queries.

Sussane
Posted on: 28th Dec, 2008 10:55 pm
We have never been late on our mortgage until 4 months ago, as our savigns ran out. We tried to refinance, but live in az--so we did not qualify to refinance as house price is less than owed. We worked with people's first fianncial--please do NOT anyone else work with them-and now are in foreclosure. The mitigators today said that the lender would not modify loan and gave 3 options- short sale, a 50% reduction of principal balance or refinance (duh, if we didn't qualify a year ago, ya think it would happen now??). I don't understnad what the 50% balance off is--do I get to save my house and only pay the 50% of the loan?? help
Posted on: 30th Dec, 2008 04:26 pm
I owe much more than my home is now worth. I am in an option arm and I can barely afford to make my payments. I am now behind by 2 months. I am considering filing for chptr 7. should I let my house go into foreclosure eventually and what do I tell the bank as they keep calling me. they have declined a loan modification due to my lack of income vs expenses.
Posted on: 30th Dec, 2008 09:35 pm
I owe much more than my home is now worth. I am in an option arm and I can barely afford to make my payments. I am now behind by 2 months. I am considering filing for chptr 7. should I let my house go into foreclosure eventually and what do I tell the bank as they keep calling me. they have declined a loan modification due to my lack of income vs expenses.
Posted on: 30th Dec, 2008 09:36 pm
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