Modification and Short Sale
Not only are we foreclosure defense attorneys at The Thorpe Law Firm, P.A., defending mortgage foreclosure cases, we also assist our clients save their home by obtaining a loan modification or some other type of work-out plan. Or, in the alternative, we help our clients minimize the chance of a deficiency in case they decide they do not want to keep the property.
In most mortgage contracts there is language that states when a borrower has become 90 days late the lender has the right to accelerate the loan and demand the entire loan be repaid on demand. Because most people cannot repay such a loan all at once, the lender will refer the loan to an attorney to file a foreclosure action. At this point the borrower should consider whether to try to keep the property or to let it go.
If the borrower decides to try to keep the property, the following are things to consider:
Reinstatement of the Loan
If the lender had its preference the borrower would reinstate the loan. Reinstatement means paying all of the missed payments plus late charges, attorney fees, and costs all at once. Many people will reinstate their current loan by making another loan or by withdrawing funds from their retirement account. Before doing this the borrower needs to decide whether this fixes the problem that originally caused the default in the first place, or whether this just delays the inevitable. Taking money out of a retirement account should be thoroughly considered before such drastic action is taken.
A forbearance agreement is the second option your lender would like to use if there is a default. A forbearance agreement, or repayment plan, may allow the borrower to temporarily reduce or suspend monthly payments until an agreed upon date. Once that date arrives, the borrower must resume making their regular monthly mortgage payments, plus make additional payments to reduce the arrears owed to the lender. A forbearance agreement may cure the default, but many times it only delays the inevitable because if the borrower was having trouble making the regular monthly payment in the first place, they almost certainly will have trouble making the increased payments called for in a forbearance agreement during the repayment period of the plan.
A loan modification is one of the best ways to avoid a foreclosure. A loan modification is a permanent change in the terms of the original loan. While parties to a contract have always been able to agree to modify the terms of their agreement, loan modifications have become more popular now that the number of foreclosure cases being filed has dramatically increased. When considering a loan modification a lender may do some of the following things:
• Financial Evaluation
A lender will require a borrower fill out financial forms disclosing their family size, income, expenses, assets, and liabilities. This process will allow the lender to determine what amount the borrower can afford to pay when setting a new payment amount. The borrower’s credit score is not used in this process. Based on the outcome of this process the lender may propose any number of the following.
• Recapitalization of Arrears
The first type of modification the lender will do is add the missed payments, late charges, attorney fees and costs back into the principal balance of the loan, and then re-amortize the loan using the same interest rate and maturity date as before to determine the new payment amount. This will typically cause a slight increase in the payment. If the borrower cannot afford this payment the lender may use other options so payment amount may be lowered.
• Reduction of the Interest Rate
If, after recapitalizing the arrears the borrower cannot afford the new payment, the lender may modify the loan by reducing the interest rate, convert an adjustable rate loan to a fixed rate loan, and re-amortize the loan to lower the monthly payments.• Extension of the Loan Payment Period
If, after the lender lowers the interest rate, the borrower still cannot afford the payment, the lender may modify the loan by extending the maturity date, or period over which the payments must be made, in order to lower the monthly payments. An extension of the loan payment period results in a total higher interest amount being paid over the life of the loan, as well as a slower accumulation of equity in the home. An example is a 30-year loan being modified to a 40-year loan.• Partial Claim or Deferred Principal
If, after recapitalizing the arrears and lowering the interest rate, the borrower still cannot afford the payment, the lender may modify the loan by deferring a portion of the principal balance to be paid at the maturity date. This is much like having a non-interest bearing balloon second mortgage that does not come due until the first mortgage is paid off.• Reduction of the Principal Balance
If, after trying all of the above the borrower still cannot afford the payments, the lender may reduce the principal balance. Because of the decline in the housing market, this is the option that is the most sought after, but unfortunately is rarely used by first mortgage lenders. If, however, the lender does agree to lower the principal balance of the loan, the monthly payment should be reduced significantly.
If the borrower decides to not keep the property, the following are things to consider:
Short Sale or Short Payoff
A short sale is another option to avoid foreclosure. A short sale is where the subject property is sold for less than the amount due. A short sale is preferable to a foreclosure because it does not affect the borrower’s credit score as much. With a short sale the property is listed with a realtor and when a buyer makes an offer, the offer is forwarded to the lender for approval. Important things to consider when attempting a short sale are making sure the sale and purchase agreement has an addendum for a short sale and that the lender is willing to forgive any deficiency.
A short refinance is, as the name suggests, the borrower refinancing the foreclosing loan with a new loan that is for an amount less than the total amount due. While a short refinance would help a borrower retain the property, the problem with a short refinance is that it is difficult to find a new lender and, as with a principal reduction in a loan modification, first mortgage lenders rarely agree to accept less than the total amount due when the original borrower wants to keep the property.
Deed in Lieu of Foreclosure
A deed in lieu of foreclosure is where the borrower deeds the property back to the lender that is foreclosing. In return, the lender may forgive the outstanding loan and any arrears the borrower owes. In order to be considered for a deed in lieu of foreclosure the property must be listed for sale with a realtor for at least 90 days. Also, there cannot be any junior encumbrances on the property (no second mortgages, liens, etc.). Recently, because of the large number of foreclosures, some lenders have been offering cash for keys. This means the lender will pay the borrower to move out of the property in exchange for a deed in lieu of foreclosure or a consent to foreclosure agreement.
At times a borrower may find a buyer for the property but the buyer is not able to obtain his own loan and therefore wants to buy the property and assume the existing loan. In this case a lender may allow the loan to be assumed by a third party, but the lender may want the buyer to complete financial statements and qualify for the loan. In the event of an assumption, the buyer assuming the loan will take over payments on the property, including making arrangements to bring the loan current. If the mortgage has a “due on sale” clause in it, then the loan will be accelerated if the property is conveyed without the prior approval of the lender. However, a lender is not allowed to block assumptions from parents to children regardless of what is stated in the mortgage.
All of the options above will negatively affect the borrower’s credit score, but usually not as badly as a foreclosure. As such, it may make it easier to obtain new credit in the future.
In addition to being foreclosure defense attorneys and assisting our clients with forbearance agreements, loan modifications, short sale, deeds in lieu of foreclosure, at The Thorpe Law Firm, P.A., we are bankruptcy attorneys and assist homeowners with Chapter 7 bankruptcy and Chapter 13 bankruptcy. For more information about the different types of bankruptcies, please see the Bankruptcy section of our site.
Additionally, The Thorpe Law Firm, P.A., assists clients negotiate principal reduction on most debts. In the past we have been able to assist clients reduce their debt from 20% to 70%. This reduction in overall debt on many occasions has helped someone save their home.