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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
no you do not need an attorney. you may want to find someone to be an advocate for you, however. counseling would appear not to be useful to you in this situation, so getting a housing counselor isn't particulary in order.

you might want to check with a legal aid office that can offer you free legal assistance in working on this. requesting a deed in lieu of foreclosure or a short sale is something one can do on one's own, but having someone in your corner will help to make sure all moves smoothly.
Posted on: 20th Apr, 2009 09:08 am
Clearly stated and understood. I am delighted to have read all this.
I am in forbearance and loan modification at the same time with EMC and I do hope by the end of July when that forbearance ends I am able to clear my debt or they are able to provide me with a loan modification otherwise, it is coming to a year when they keep extending my modification. Every time I call and ask before the period given is about to expire they say they are working on it and they will extend me six more months! I once thought, they are buying time to take away my home.
Anyone knows any investors who would want to buy my loan and so I keep my home still???
Posted on: 22nd May, 2009 09:00 am
i don't think they are buying time to take away your home, nelson. i think they have insufficient staff to keep up with all the consumers who need assistance, and being overburdened, they are unable to figure out how to express that situation to consumers.

in other words, they can't even be honest with themselves.

no lender in this wacky country of ours desires to take anyone's house. the last thing they want to do is to own real estate.
Posted on: 22nd May, 2009 10:01 am
My husband was transferred from AZ last year and we had to move out of a house we paid over $400,000 for. We have renters in the home who only pay a portion of our mortgage. The property continues to lose value and they are asking for a $300 rent reduction. Since moving, I have not been able to find work and he was just told he is going to have a salary cut. We can't keep paying this mortgage and don't know what we can qualify for since it is no longer our primary residence. Worse yet, when we moved into this house, we kept our old house as a rental and can't sell it either. We also have a second on the house. I can't sleep at night because I am so stressed. What options do we have for this house that is now assessed at $100,000 under what we paid for it? We're trying so hard to not kill our credit but can't continue to make these payments. Please help!!! THANK YOU
Posted on: 23rd May, 2009 09:26 am
Hi SMS!

Welcome to forums!

You're in a difficult situation. It will be better if you could now sell off the rental property by going for a deed in lieu of foreclosure. However, this will badly effect your credit score and lower it by 250 points. But you should note that if you go for a deed in lieu, you'll not be liable for the deficient amount resulting from the sale of the property.

Feel free to ask if you have further queries.

Sussane
Posted on: 24th May, 2009 09:49 pm
I haven't lived in my house for 2 years, and now I am behind 3 months in an interest only loan, the house has been vacant for the whole time, and on the market. My realtor hasn't had any offers in 2 years, and this is with us dropping the price by 24,000 to 89,000 and still no offers. Can I go to jail if I just walk away?
Posted on: 27th May, 2009 11:10 am
if jail is in walking distance, i suppose you could go there. :D

but seriously, you don't have to worry about them locking you up for walking away - wait...you don't live there to begin with, so how can you walk away?

the answer still stands - don't worry about jail.
Posted on: 27th May, 2009 02:36 pm
I really get amused :lol: with the query. but still george rightly said if the person is not staying on the place then it is not possible that police will come behind you.I do not find any reason.

Apart from that if it is interest only loan then i think there is no reason why person should behind the payments. anyway do not worry. :arrow: :arrow:
Posted on: 01st Jun, 2009 06:05 am
Hello all:

I applied for the H4H (Hope for Homeowners act of 2008) in October, qualified under all the rules. The bank was about to let me sign a new modified loan in March 2009, but has now dragged their heels until modifications were made by Congress and signed into law on May 20, 2009.

Now my bank is telling me I need to submit my new current income to the H4H program in order to re-qualify (previously the law stated March 2008 income, now it's current income). When I do that I will not qualify (the Gross Income - to - Mortgage payment ratio must be above a certain limit; now I am 2% below that limit). My bank has told me repeatedly that the H4H is the only program that is available to me at the present time.

My house that I bought for $240,000 is now worth $73,000 according to the H4H Broker Price Opinion conducted in January 2009.

Can I realistically execute a deed-in-lieu of foreclosure and then purchase another house that is more affordable? Will the bank even enter into a deed-in-lieu if they think I can afford my current home? What are the risks of a deed-in-lieu? (I heard that it's 4 years of bad credit, and most lenders will require 10% down on a purchase of a new home).
Posted on: 03rd Jun, 2009 10:10 am
Hi d_h,

Accepting a deed in lieu will be the lender's discretion. You'll have to write a hardship letter to the lender and apply for a deed in lieu. The lender will judge your financial situation and decide whether he would accept your request or not.

A deed in lieu will lower your credit score by 250 points and it will remain in your credit report for the next 7 years. Moreover, you won't be able to get a loan before 3-4 years once you go for a deed in lieu.

Take Care.
Posted on: 04th Jun, 2009 01:54 am
I have lost my job, we only have one income now and to date we are current on our mortgage. i am in the process of a loan modification with wells. with what i have stated will i still be considered for a loan modification?
Posted on: 04th Jun, 2009 05:00 pm
Your query has been answered in the given link:
http://www.mortgagefit.com/wellfargo/loan-modification-3.html#99752

Please take a look at it. I hope it'll help you.
Posted on: 04th Jun, 2009 11:29 pm
adonis - thank you i will check into the website you provided. any other information you or anyone else can provide - i will gladly accept.
Posted on: 05th Jun, 2009 11:04 am
Does anyone know who to talk to or how to update information on my loan modification paper work with Wells Fargo? HELP please……..
Posted on: 05th Jun, 2009 11:46 am
Hi pjb,

You need to contact Well Fargo and get the details about their loan modification process. Contact the loss mitigation department of Wells Fargo for further information.

Thanks
Posted on: 05th Jun, 2009 10:05 pm
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