Guidelines For Loan Modification..."A Road Map"

If you can’t qualify to refinance under President Obama’s "Making Home Affordable Plan", you might still have a chance to lower your monthly payments by doing a loan modification. This portion of the plan is aimed at people who are — or who soon will be – having a tough time paying their mortgage, but who would be able to afford their home if the interest rate on their mortgage was lowered.

Who qualifies?

This will only apply to the first mortgage on your primary residence. To qualify, you must:

• Have originated your mortgage before Jan. 1, 2009.
• Be an owner-occupant.
• Have an unpaid balance that is equal to or less than $729,750 (for a single-family home).
• Have trouble paying your mortgage due to financial hardship. That could be because you have had an increase in your mortgage payments, or because your income was reduced or you suffered a hardship (like medical problems) that increased your bills, or, you can show that you soon will be unable to make your payments. You will be required to submit a lettter of financial hardship.
• Your monthly mortgage payment must also be more than 31% of your gross (pre-tax) monthly income.

To seal the deal, you must successfully complete a three-month trial period at the modified rate. If you make all payments on time, you will keep this lower rate that will be fixed for five years.

I Owe Way More Than My Home is Worth? Am I Eligible?

Yes, how underwater you are (or aren’t) doesn’t matter for this program.

What if I am About to be Foreclosed On?

The foreclosure process will stop while you’re being considered for the program (or for any alternative foreclosure prevention option).

How Will This Help?

The aim is for your monthly payments (not including private mortgage insurance) to reach 31% of your pre-tax monthly income. The monthly payments are defined as payments on the principal, interest, taxes, insurance (not including mortgage insurance) and homeowners association/condo fees.

First, the lender will reduce the interest rate to no less than 2% on the loan so that the monthly payments are less than 38% of your monthly income. Then, the Treasury will match further reductions, dollar-for-dollar, with your lender, to bring the monthly payments down further, to 31% of your monthly income.

If you keep your payments on time after the modification, the government will pay up to $1,000 each year in the first five years toward reducing the principal on your mortgage.

After five years, the interest rate on the loan will start to increase by no more than 1% per year, but can’t go higher than what the market rate was (as determined by Freddie Mac) on the day your loan was modified.

What Will it Cost?

Under the program, the borrower does not have to pay any charges or fees. Any fees are supposed to be paid by the company that holds the loan, and the servicer of the loan will pay for your credit report.

What’s in it for My Lender/Servicer?

The company that services your loan will get a an incentive fee of $500 for each modification they do. Once your lender modifies your loan, they’ll be paid a $1,500 incentive.

Is There a Deadline?

New borrowers will be accepted until Dec. 31, 2012.

How Do I Start?

It is advisable to retain the services of a qualified loan modification professional to put together the package, submit, negotiate, and follow through to completion. You may ask, can I do the loan modification myself and avoid the fees of hiring a professional? The answer is, most certainly you can do that...feel free to call your loan servicing company. The down side to this is that the typical homeowner is not well-versed in negotiating with front line individuals at the loan servicing company, let alone those in the loss mitigation department. Homeowners who are facing the financial challenges of not being able to stay current on their mortgage will benefit greatly by working with a qualified loan modification professional, as this will greatly reduce the stress that the homeowner is experiencing, and will ensure that the homeowner's negotiating position is strong. Throughout the process, the loan modification professional puts together the financial package to submit to the lender, follows through, and provides the negotiation necessary to insure the best possible scenario for the homeowner.

Loan servicing companies are not required to join or accept the loan modification program, but the government hopes that the incentives, along with the fact that this could help millions avoid defaulting on their mortgage, will motivate them to participate.

For more information, visit:

http://www.financialstability.gov/

Do You Qualify For a Loan Modification?

Lenders and loan servicing companies in general, look for one thing when you submit a loan modification request. First, they look for a hardship that can be documented, but at the end of the day if they decide to grant your request for a loan modification all they really want to know is if you can afford the new payment(s). This is the big secret behind getting a loan modification approved.

There is an art to making loan modifications work. You must demonstrate that you cannot afford your previous mortgage payments while showing that you can afford the new payment structure. It sounds complicated. It is at first but you will rapidly learn key strategies for effectively processing loan modifications.

To understand what the lender or loan servicing company considers "qualified", you have to know how lenders calculate your income. The income you can use to qualify for a modification is different from income calculations used to qualify for traditional loans. The difference in the qualification guidelines is typically in your favor.

For a loan modification, you can qualify based on your documented total household income. You can count income from almost any source: Grandma’s SSI, income from child day care services, from a second job paid under the table, etc... as long as it can be proved. Proof must be in the form of bank statements, 1099’s or in some other documented form as outlined in the submission paperwork you will provide the lender. In addition, if only one of two spouses was on the original loan, the other spouse’s income can count so long as it can be documented. Once you calculate documented, monthly household income from all sources, you can present this to the lender as new qualifying income.

To calculate a qualifying monthly mortgage payment, use the benchmark fully amortizing 5.00% rate on whatever the new balance might be. Count payments in the rears if they are added back into the loan. WARNING: this is only for a general qualifying exercise. Do not expect this rate or this payment! If the payment at 5.00% is just too high, then you may not be an appropriate candidate for a modification. However, you can still request help with other services such as a deed in lieu of foreclosure, a short sale, or postponing as long as possible a notice of trustee’s sale in an effort to help you transition to more affordable housing.

Qualifying for loan modification is a fairly straight forward process. It can be challenging for the homeowner, as they are navigating a mine field. Utilizing loan modification professionals brings efficiency to the process, and peace of mind for the client,

Tax Ramifications of Foreclosures and Short Sales

The IRS has a unique way of getting into our back pockets even if we are facing financial challenges. If you transfer title on your home, no matter whether it is voluntary or forced...you have "sold your home". You may have transferred it voluntarily through through a warranty deed or a grant deed, or you may have transferred it involuntarily through foreclosure. Under the tax code, you might be subject to taxes even if you lost money on the sale either by "selling short" or being "foreclosed" upon.

This seems really unfair...and to make matters worse, you might not even find out aoubt your tax ramification until you receive a 1099 - A in the mail at the end of the year.

Sellers who have owned their homes for lengthy periods of time most often will appreciate a "capital gain" during the sale of their property. However sellers of real estate who acquired them within say a time frame of 2-3 years, often will incur a net loss at the time of sale. Even if they do not lose value on the property, there are closing costs to incur such as real estate, escrow, and title fees that can be significant. It does not matter the seller's position...they cannot deduct the losses...no matter what forced them to sell.

Besides the problems for sellers of personal residences, investors are feeling this pain as well. This is true, especially in markets where real estate was purchased with the intent to "flip" within a short period of time. The market changed, they are stuck with real estate that is declining in value...rents do not cover the monthly expenses...they are forced to make a hard choice. Do they hold on or let the property go and face possible tax ramifications...

Sellers can offset their capital losses against capital gains under the current tax code. However if there are no gains, there is a yearly cap in the amount they can write off their taxes. It is $3000.00 ($1500.00 for married couples filing separately) on the amount of losses that can be offset against their "ordinary income".

The IRS has specific rules for foreclosures and short sales. These can be painful and severe, especially for the homeowner or investor who has already incurred significant expense and losses due to losing their property.

I am going to give you an example...Mr. Jones purchase a home for $200,000. He puts 10% down and takes out a mortgage for $180,000. Over the next 18 mos he manages to pay down his mortgage to $175,000, then he becomes very ill...loses his job and incurs significant medical expenses. He defaults on his mortgage payments and is forced to give the home to the bank. The IRS code treats this as a sale. The real estate market in this area has declined due to a major manufacturing plant closing its doors. The current market value of similar homes down the street has fallen to $140,000. Mr Jones incurs a $60,000 loss that cannot be deducted. His house is sold at the auction for $140,000. He gets a "1099 - A" at the end of the year. It indicates the foreclosure bid price of $140,000, the amount of Mr Jones' debt of $175,000, and his personal tax liability of $35,000. This is taxed at the rate of "ordinary income"...the same as salaries and tips. This is a typical problem seen when the homeowner is personally liable for the debt.

There is another type of scenario where the person taking out the loan is not "personally liable" for the loan...the tax ramifications are not so severe under the code. According to Kleinrock Publishing, "the IRS says sellers who are not personally liable for a debt will realize an amount that includes the full canceled debt, even if the value of the property that is security for the debt is less, which can be offset depending on your adjusted basis in the property". For example, Mr. Jones purchases a home for $200,000. Mr Jones puts 10% down and takes out a mortgage for $180,000. He pays down the mortgage to $175,000 then stops making payments. The bank forecloses on the loan for $175,000. The value has dropped to $150,000. The property sells for $150,000 at the auction. Mr. Smith realizes an amount of $175,000 on the foreclosure, but has an adjusted basis of $180,000 due to a "casualty loss" of $5,000. He owes no tax. This is a rare scenario, as banks and savvy lenders almost always require the individual who takes out the loan to sign "personally" for the note.

The tax code is extremely confusing to navigate under normal circumstances, let alone when you are facing challenges and are under significant stress. The above examples are for informational purposes only and should not be taken as "tax advice". If you are considering a short sale process or foreclosure, you should always consult a qualified CPA and tax attorney to get accurate, real world advise. Make sure you completely understand your options. Do your planning ahead of time....DO NOT wait until the last minute. Consider loan modification. This is a very viable option. We have solutions and can help...contact me directly for a free confidential consultation.

Stop The Foreclosure Process

Homeowners who are facing foreclosure frequently have difficulty dealing with the facts that landed them there in the first place. Few homeowners ever think that they will go into foreclosure...it is the furthest thing from their mind.

Apart from those individuals who commit mortgage fraud...take out a loan without ever intending to pay...I have listed a few reasons that can cause a homeowner to stop making payments:

1.] Loss of employment
2.] Medical emergency or sudden illness
3.] Death in the family
4.] Divorce
5.] Excessive debt obligations
6.] Job status/financial changes
7.] ARM changes
8.] Unforeseen major home expenses

The best way to avoid foreclosure is to prevent the filing of a "Notice of Default". Lenders do not want a foreclosure on their hands, but will file a "Notice of Default" to protect their interests. If you are finding yourself in this type of situation, communicating with your lender to see what your options are is a prudent way of handling the problem, rather than waiting until the "Notice of Default" is in play.

The lender may agree to working out a payment plan to make up the back payments. This is called "Forbearance".

A rare but second option is "Payment Forgiveness". This is where the lender, based on your past history and present circumstances, may forgive one or two payments.

The lender may also allow you to add a small amount to your regular payment over the course of time to make up the difference, all the while keeping current.

In our current economic situation, Loan Modification is very viable option where the lender negotiates with the borrower, usually with the help of a "Loan Modification Professional" to change the terms of the loan. This varies from lender to lender and on a case by case basis. The borrower must demonstrate a hardship as well as be behind on their mortgage payments. Changes can range from a decrease in the interest rate, extend the length of the loan, or change an ARM to a fixed 30 year loan. At times the lender may forgive the interest accrued in a negative amortization loan and on a more rare situation principal reduction may come into play. With the new Obama plan, we should see more principal reduction to the current home market value when modifying loans.

If your house is in foreclosure, selling your home, selling your home in a short sale, or signing a "Deed-in-Lieu of Foreclosure" are all other options. When you sign the "Deed -in-Lieu of Foreclosure", you have deeded the home back to the lender and the lender forgives the debt. Lenders tell us that credit is affected in the same way as if the house was foreclosed upon.

Successfully completely the loan modification process is the best option. It is a "Win-Win" for the lender and the borrower. The borrower remains in their home. Psychologically, this is positive along with the financial issues being resolved. It is good for the lender as well because when a property is foreclosed upon, the note immediately loses at least 50% in value, and legal fees that can easily exceed $20k.

Stopping foreclosures is a challenge for the homeowner. With good communication, a good loan modification plan, proper counsel and professional guidance, the process can be mitigated. The homeowner remains in the home under better circumstances, the lender avoids the financial losses associated with the foreclosure process and usually is able to re-coop the losses over a period of time.

Our current economic situation demands that we are proactive in various ways to avoid foreclosure. By taking a proactive stance, we will effect change that over time that will improve the current economic crisis.

Financial Challenges...Financial Opportunites...

If you are experiencing financial challenges and need assistance with your mortgage...we have options...

If you are looking for an opportunity to improve your lifestyle...as little as 15 minutes a day can change your life...We can show you how to "Empower" yourself...

Contact me directly for more information...

Martin Casper, LLC
702.553.5522
martin@martincasperlvre.com

How To Navigate The Short Sale Process

There are numerous ways to lose a home, however surrendering ownership in a manner that ruins credit, strips away the owner's dignity as well as embarrassing the family is very challenging. Owners who are staring down foreclosure or worse...bankruptcy...there are other options; "short sale" and now "loan modification".

A "short sale" is a situation where the homeowner owes more than the house is worth. The homeowner negotiates with the lender to sell the house for less than the value of the note. Often times this involves both a first and a second mortgage. When the real estate goes to contract, the lender(s) must agree to the "short" terms. Sometimes the sales price is rejected by one or both lenders...both must agree. The second mortgage stands to be in the weakest position here. Whether you are buying or selling "short", it is always advisable to seek the advice of a competent real estate attorney and your tax professional to ensure that you are properly advised in all aspects.

Short Sellers may be liable for income taxes on the portion of the loan that is "short", as the IRS views this as income (see your tax professional for advice) per the Mortgage Forgiveness Debt Relief Act of 2007. Lenders often will demand a myriad of documents verifying different aspects of the seller's personal and financial profile.

The following steps give you an idea of a game plan to follow throughout the process:

1.] Call the lender.
2.] Submit a Letter of Authorization (LOA. This is done
for purposes of the agent representing you) It should include;
property address, loan reference number, name of the
borrower, as well as your agent's name and contact information.
3.] Preliminary Net Sheet of Closing Costs.
4.] Hardship Letter.
5.] Proof of Income and Assets.
6.] Copies of Bank Statements.
7.] Comparative Market Analysis of the Property.
8.] Purchase Agreement & Listing Agreement.

When you employ the services of a qualified real estate professional, they should give you a comprehensive list of what you need to provide the lender. Once you have the documents put together, you have spoken to the lender along with providing the LOA for your real estate agent, your agent should take control and handle the situation from there on out.

The short sale process can be a daunting task. There are many challenges that arise while trying to successfully close a short sale. Knowing this, it is very important that you as the homeowner do your due diligence when selecting the firm and the agent to represent your transaction. This is critical because a real estate agent can easily make or break a short sale transaction.

If you cannot successfully transact a short sale, and all other means have been exhausted, the option of foreclosure exists...although a more drastic approach...sometimes it can be the "best of the wors"t...we will discuss this important aspect next. Until then...

The Basics Of Buying And Selling Short Sales As Well As Foreclosures

As I mentioned yesterday, not all homes that go into default go all the way through the foreclosure process. Many are sold before the notice of default is completed. Short sales and foreclosures are attractive to buyers and investors because the price is usually significantly below market value.

Sellers in foreclosure tend to ignore the problem...kind of like the "Ostrich" approach...bury their head in the sand. However, there are options...
1.] Forbearance, a short term option whereby the lender allows the borrower to not pay for typically three months, giving the borrower some time to get their finances in order.
2.] Loan modification, where the terms of the existing loan are modified to accommodate more favorable payment terms for the borrower, thus allowing them to remain in their home. These can be any or all of the following; decrease interest rate, extending the length of the loan, forgiveness of negative equity, to name just a few options.
3.] Sell short. This where the home is for sale and the selling price is lower than the total loan amount. The seller negotiates with the lender(s) to forgive the difference between the market/sales price and the what is owed.
4.] Foreclosure; where the homeowner stops paying and allows the bank to re-posses it. Whether it is a short sale or a foreclosure, there will be "debt forgiveness" involved. When this happens, there can be tax ramifications as the IRS may consider this "Taxable Income" under the law. You should always seek out the advise of a qualified tax professional prior to making these choices.

Not all short sales or foreclosures are a wise investment. For the buyer...it is important to understand that to pull a house out of foreclosure, the buyer usually has to make all payments current, pay all imposed fees as well as refinance the property. It is rare that a loan is assumable in this type of situation.

When purchasing real estate that is distressed, it will be done one of three ways; purchase from the seller in foreclosure, negotiating the purchase of a short sale, or purchasing the property from the bank after the foreclosure process is complete.

Purchasing real estate that is being sold "Short" is a challenging and lengthy process at best. It can be significantly more challenging than a foreclosure due to a number of reasons such as...
1.] You must negotiate the deal with the seller.
2.] You must negotiate with the bank(s) Most often there will be a first and a second note against the property. You must negotiate with each lender separately. One or both have the option of rejecting the proposal. This is a time consuming project. It is often emotionally exhausting for the buyer. Response times are drawn out as lenders are usually overloaded in the loss mitigation department. Frequently, there are multiple offers pending on the property that also contribute to the lengthy process.

Before the real estate goes to public auction, the property may be purchased out of foreclosure. Buyers can also bid on the property at the auction. It is important that buyers get as much information on the property prior to entertaining the option to bid. Typically, the buyer must provide some sort of cash deposit prior to participating in the auction process. It is important to review the terms of the auction, prior to bidding, to insure that you do not put yourself in a position of weakness. Do your due diligence...know the market prior to participating in the auction process. Be confident that your target price will be below market value. Have your bidding limit dollar figure in mind for each piece of property. Finally, do not let emotion play into purchasing these types of property. It is always about the "number".

Key notes for investors; Always know your market. Know your fix up costs...what will it take to get the property in shape? What rents can you command? Do you really feel that over a period of time there will be enough capitol appreciation, that you can be profitable at the point of sale?

My next post will delve into more aspects of "Selling Short" Until then...