BuyandClose.com Blog

Upcoming Reports for this week

Monday, March 24
February Existing-Home Sales
National Association of Realtors

Tuesday, March 25

ASF Securitization Institute: Comprehensive Institute
ASF New York Headquarters
New York, NY
 

Wednesday, March 26
February New Home Sales
U.S. Census Bureau

How this could impact your rate - PLEASE VISIT :

http://www.buyandclose.com/DailyRateLockAdvisory 

According to GasBuddy.com, this represents a 25% increase in the last 12 months.

Higher gas prices are leaving Americans with fewer discretionary dollars to spend and that is playing a role in the U.S. economy's slowdown.  It's one reason why mortgage rates have stayed low despite steady upside pressure from inflation.

High gas prices are also a reason why Thursday's Retail Sales data will be closely watched; markets will gain insight into whether Americans are cutting back on personal spending because of rising energy costs.

Retail Sales are expected to have risen by a slight 0.1%.  If the actual number is lower, mortgage rates should fall on recession fears.  If it's higher, rates should rise.

What is a foreclosure?

As defined by Wikipedia…Foreclosure is the legal process in which a bank or other secured creditor sells or repossesses a parcel of real property (immovable property) after the owner has failed to comply with an agreement between the lender and borrower called a “mortgage” or “deed of trust”. Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a lien on the property. When the process is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs, and it is typically said that “the lender has foreclosed its mortgage or lien”.

Where do I find foreclosed properties?

Is buying a foreclosure just like any other property?

The procedure for buying a foreclosure that is listed in the Multiple Listing Service is much the same as any other property. The seller is typically a bank or a third party company that the bank has designated to handle their foreclosures. But here are a few differences you may encounter:

• Most foreclosures will require that you close within 30 days.
• Most foreclosures are sold in as is condition. Property inspections are of particular importance in a foreclosure sale. Many times the previous owner has removed fixtures or left the property in some state of disrepair.
• Your offer may take some time to get a response. Since you are dealing with an absentee owner, your offer may take some time to be accepted or counter-offered and the response may be verbal. Some offers may require an approval from a higher source before it can be expected. The best way to proceed in making an offer is to make your contract as straightforward as possible.
• Some foreclosures may be done on special contract forms or require special addenda. Ask for samples of these forms when you see the property so that you will be prepared when you make your offer.
• Many foreclosures will ask for your financing information prior to accepting the offer.

What if the property is listed as “pre-foreclosure”?

When a property is listed as “pre-foreclosure” it means anything from a homeowner has missed a payment or two or the property already has a lis pendens which means a lawsuit on the property has been filed. Since the foreclosure is not complete, the process to purchase may be a little less defined and could take a bit more time to purchase.

What is a short sale?

When a property owner owes more on their mortgage than the property is worth, the listing may be deemed a short sale. In some short sale cases, the property owner may be current on the mortgage and just needs to sell. How the short fall is handled can vary depending on the financial circumstances of the property owner. It is certainly of the utmost importance to know how much is owed on a short sale and how the deficit will be handled. In cases where the mortgage holder may be willing to negotiate the deficit, be aware that there may be a significant time delay from the time you make an offer until you know you have a contract. In some cases this can be months instead of days. If you want to purchase a short sale, make sure you factor extra time into your equation.

Is financing available for foreclosed properties?

Yes, there is financing available for foreclosed properties. With the FHA limits increased in our area to $423,750, FHA loans are a great source to buy that foreclosure with a small down payment. If the property needs rehabilitation, FHA also has a loan that will allow you to finance the improvements needed to fix up the property. Conventional loans are also available as long as the property is in decent condition. It is always a good idea to speak to a mortgage loan officer before making an offer to see what options are available.

If you know you must miss a mortgage payment, the worst thing you can do is to hope that no one will notice, or that if you don't answer the phone your lender will assume you are just a very busy person and wait patiently for you to catch up. Ostriches don't solve problems and, in the present context, don't usually manage to duck foreclosure.

One missed payment greases the slipperiest of slopes and by the time you miss payment two, you will be sliding down that slope pretty fast.

Therefore, once you have even an inkling that you might have to skip a mortgage payment, contact your lender or the company servicing your mortgage. Ask for customer service and explain, politely, calmly, and in the most concise manner possible your current financial situation. A wild desire for a new SUV or plans for a $50,000 wedding are not going to cut it, but a real emergency will probably earn a hearing.

You might be told that, since you have not missed a payment, there is nothing that anyone can do so ask that your call be recorded and obtain the representative's identifying information or a case number. Hang on to this information to prove that you did try to get ahead of the situation. Once you actually miss the payment, call again.

As we stated in the earlier article, there can be a hundred different ways your problem is handled. This is to some extent dictated by state law but is mostly driven by the philosophy and policies of your lender and the company with the rights to service your loan.

Fannie Mae, Freddie Mac, FHA, the VA and many private investors have finally realized that it costs a lot of money to foreclose on a house and that, at the end of the day they don't really want to be property managers. Thus they are increasingly willing to provide borrowers with assistance to help stop foreclosures when possible and to affect a smooth transfer of the property when they are not. Furthermore, they are training those who service for them and are even penalizing servicers who do not work energetically to mitigate forclosure losses. But there are lenders and servicers who still operate in an aggressive collectors' mode; bullying the borrower, refusing to consider a workout or compromise. Some even defy fair collection rules and harass delinquent borrowers.

But you have to do the best you can with what you have to work with.

Borrow from Peter

A temporary mortgage shortfall because of an unexpected emergency is quite different from an ongoing problem resulting from a job loss or overwhelming debt. If the problem is short term, maybe there are adjustments you can make; can you slip other payments - utilities, student loans, credit cards? None of your creditors are going to take a missed payment well, but some will be easier to deal with than others. Contact them all and find out what accommodations they might make. Will these adjustments allow you to squeak out the mortgage payment? A great solution as long as you can catch up with everybody else in a month or two.

Some financial experts advise always having a home equity line in place for just such emergencies. This presumes, of course, that you have the equity and credit to qualify for such a line, but it can certainly be a lifeline in sudden emergencies. Once you are in trouble, however, it is probably too late to invoke this solution.

Mortgage Workout

Mortgage lenders are often willing to make substantial concessions to stop home foreclosure and keep you in your home.

A workout might be as simple as allowing you a few months of forbearance during which partial payments will be accepted or you can skip paying altogether. This might be followed by a temporary arrangement in which you make the regular payment plus an amount to catch up the past due amount over a period of time. If you are substantially delinquent or the ability to catch up seems far away, a workout could involve converting the past due amount to principal and re-amortizing the loan, possibly at a lower interest rate. Maybe just a temporary or permanent interest rate reduction would be enough to pull things back together.

Loan workouts usually require a lot of work on the borrower's part - there will be financial statements to complete, maybe copies of recent tax returns, letters justifying the financial emergency, copies of bank statements, etc and the lender will want an appraisal although they will often make due with a drive-by or "windshield" appraisal. Many lenders work through this documentation with maddening slowness and may be unwilling to help stop foreclosure that is grinding along independent of the restructuring. Thus a borrower can find himself in a race between workout and foreclosure while his debt continues to mount.

It is important to note that many lenders/servicers will assess a fee for restructuring a loan and that a second mortgage or any tax, mechanics, or homeowners' association liens may hopelessly complicate the process.

There is no point going through a workout if it is obvious that you will be unable to keep up the new payments any better than the old. There may be a point at which you must be absolutely honest about whether or not you can afford to stay in the house.

If the answer is no, there are still alternatives. Ask your lender to provide enough forbearance to allow you to sell the house, hopefully for enough to pay off the mortgage and any accumulated fees and give you enough left over to get on your feet. If it is doubtful that the sale will cover the mortgage and selling expenses, explore a "mortgage short sale" (see "Mortgage Short Sale - An Exit Strategy or an Investment Opportunity, July 5, 2005). Another option is a deed in lieu of foreclosure in which you surrender ownership without going through the foreclosure process. Again if there is a second mortgage or other liens this alternative probably will not work. Foreclosure of a 1st lien wipes out all subsequent liens (except for taxes and some specialized exceptions) but a deed in lieu does not. Thus the lender will be left owning a property subject to other encumbrances, a prospect he probably will not even consider.

Another important thing to remember is that a foreclosure or a deed-in-lieu does not necessarily wipe out your debt. If the sale of the property does not satisfy the debt (and remember all of those late and legal fees that have been piled on) the lender can seek a judgment for the deficiency. The lender can seek to satisfy this judgment from any asset you own, although retirement accounts are usually immune and judgments can last for as many as 20 years.

The last alternative is filing for bankruptcy to stop foreclosure. Bankruptcy will stop a foreclosure dead in its tracks, for a while, but doesn't guarantee you can keep your house and has far-reaching and long-lasting ramifications. Consult with an attorney before you even think seriously about this possibility.

Again, the very best thing you can do if you are ever confronted with this painful situation is to face it squarely, be upfront with your lender, and brutally honest with yourself.

As highlighted in the Wall Street Journal article above in many instances FHA loans have become less expensive than conventional loans. These new loans limits, the fact that interest remain near historic lows and that we remain in a very strong buyers market have set the stage for the stabilization of the local single family home market. It may take some time before loans under the new FHA caps are available and as soon as they are rest assured that we will get the word out.

I think that it is also important to point out these two great benefits for FHA Loans :

NO FICO - FHA loans are not credit score driven; there is no minimum FICO requirement.

97% FINANCING - FHA loan requires a minimum cash investment of 3% by the buyer which may be a combination of down payment and allowable closing costs. However, seller financing contributions can be up to 6% of the sales price and buyer could also use gift money to cover his 3%.

The smart money is buying now!

Definition: A modification or revision of the original mortgage note typically completed to provide payment or adjusting interest rate relief to the borrower.  The lender can modify the mortgage in order to roll delinquent amounts into the principal, extend the term of the loan or freeze/lower the interest rate to lower or maintain the monthly payment.

Is modification right for you? For most a modification is the preferred method of obtaining relief from your current mortgage obligation as it is less costly than a refinance.  That being said modifications are not always available and are approved on a case by case basis. 

What’s the next step?  As with most business matters communication is of the highest importance, so gather copies of your most recent mortgage statements from your lender, copies your bank accounts statements and prepare an explanation of the hardship you are experiencing prior to contacting your lender.  Your payment coupon should have a contact or customer services number that you can call and ask for the “loss mitigation” or “loan modification” department. Remember, lenders are receiving thousands of phones calls regarding mortgage modifications everyday so be patient.  The representative you speak to is there to help but in most instances does not have the authority to make a final decision regarding your loan so be courteous and understand that it may take several days or weeks for a determination to be made in your case.  If you can, contact an attorney or qualified professional to help you negotiate with your lender.

Resources:

http://www.hud.gov/offices/hsg/sfh/econ/econ.cfm

http://www.whitehouse.gov/news/releases/2007/12/20071206-9.html

For a lot of homebuyers, calculating a prospective mortgage payment is an online experience.  For example, a search on Google for "mortgage calculator" returns 39 million options.  Some people, however, prefer to plan on their local hard drive using spreadsheets.  For these people, the hardest part is often figuring out what formulas to use.

Interest Only Payments

Home loans with interest only payments are much more simple to calculate than amortizing loans.  Using the graphic below as a guide, enter your loan size and your interest rate into two separate spreadsheet cells.  Then, create a third cell and input the following formula that calculates the "Monthly Payment". 

The formula is: = (Loan Size) * (Interest Rate) / 12

Principal + Interest Payments

For a home loan with (principal + interest) payments, the formula is a little bit more complicated than with an interest only home loan.  Using the graphic below as a guide, enter your loan size, your interest rate and the duration of your home loan into three separate spreadsheet cells.  Then, create a fourth cell and input the following formula that calculates the "Monthly Payment". 

The formula is: = - PMT(Interest Rate/12, Loan Term in Months, Loan Size)

For additional spreadsheet formulas and more in-depth reporting, explore your software's "Help" feature to see what you can find.

After the passage of the Mortgage Forgiveness Debt Relief Act of 2007, foreclosed homeowners have one less worry: taxes.

When a homeowner defaults on a home loan, a mortgage lender will sometimes "forgive" the debt owed. One example is when a foreclosed home sells for less money than is owed on it.  The mortgage lender will sometimes accept this lesser amount, while considering the mortgage to be "paid in full".  This is often called a "short sale" because the lender is "short" of the full amount owed.

Prior to Thursday, the IRS treated the forgiven mortgage debt as taxable income.  This added thousands of dollars to a foreclosed homeowner's tax liability.  A $50,000 short sale, for example, could yield an additional $12,500 in taxes owed.  After the bill's passage, that tax liability is gone.  No taxes will be owed on primary residence mortgage debt that is forgiven or written off by a mortgage lender.

The bill has two sides, though. 

In order to recover the estimated $650 million in tax revenue that will be lost, Congress has limited the amount of tax breaks available on the sale of second/vacation homes.  That will be impactful on homeowners, too, of course.

If you think the Mortgage Forgiveness Debt Relief Act of 2007 will impact you personally, be sure to talk with your accountant.