Saturday, August 28, 2010

Distressed Homeowners Get HELP!

If you cannot afford your current financial commitments it may be time to get professional help. Below are some guidelines and resources: 

The loss of their home's value has caught many people off guard. Even folks with good jobs and modest 80% LTV (loan amount to home value) now find their value may have dropped 20% or more in the last two or three years. As mortgage professionals, we have many resources, but we are not magicians! Fortunately, the same guidelines that lenders apply to mortgage lending (which we must know backwards and forwards) also apply to your new situation, although they are applied differently - you'll see how below. It is extremely and painfully obvious to banks that many homeowners simply would not now qualify for the same loan they now hold. Your mortgage balance represents their interest in your property -- which may now be greater than what the collateral (your home) is worth. So essentially you and your bank are both in trouble.

So what do you do?
Well for starters, (and I know this is boring and insulting), it really helps to sit down with your family budget and look at what you are now spending for basics, including your house, insurance, taxes, maintenance, cars, car insurance, food, health insurance. utilities, food...all the necessities.  I can't tell you how many people have returned this form to me completely blank. Many of us live in denial about what our lifestyles are actually costing us. So get this: it's important and the starting point of your financial recovery.

This simple two page form Budget Form is available from the Washington Department of Financial Institutions. This same form is used by the Loan Modification agents and HUD Counseling Agencies to assess your situation. The exercise takes 20 minutes tops. If you find this hard to do perhaps there is something amiss in your relationship with money. Gather the relevant bills and just do it.

After you have completed the form: Divide your Expenses by your Income like so:

Distressed Example: Expenses $3,000 per month divided by Income of $5000 per month
             = .60 = Debt to Income Ratio of 60%

At 60% DTI you are well over what is considered a safe lending limit according to the Fannie Mae/Freddie Mac and FHA guidelines. The lending limits today allow DTI of 41-45% depending on the loan type. For some earners with very low expenses and good assets, they may be qualified for up to 55% DTI. The Loan Modification HAMP/MHA guidelines top out around 31% DTI. Translated:

Lending Example: Expenses $3,000 per month divided by Income of $7000 per month
             = .428 = Debt to Income Ratio of 42.8% (under 45% limit--this is considered 'safe')

Modification Example: Expenses $3,000 per month divided by Income of $9650 per month
            = .31 = Debt to Income Ratio of 31.%

In these examples above I used the same expenses to show how much more income is required to get into the 'safe zone'. In other words, something has to give. Either you make more money, or your expenses must be reduced. Since the largest item on most people's budget is their mortgage, that specific payment may be adjusted or conversely, your income may have to increase to sustain your current lifestyle.

What is possible depends entirely on you and your situation.
If you are over the DTI of 31% as outlined above, then you may be advised apply for a Loan Modification. A hardship situation is required to qualify for the government relief programs, HAMP or MHA. A hardship is defined as any event that has impacted your ability to meet your financial obligations outside your control including: loss of job, divorce, death of spouse, medical event, increased responsibilities (child or elderly care), disability, natural disaster, and a host of other ills that may have befallen your household.

If you find yourself in debt due to your own excess or poor judgement then legal help may be required. A combination approach may be called for if you have more than one cause.

Where to Start:
You will be told by all the public infomercials to call your bank first. Don't waste your breath and time on hold. The fact is not many banks are bothering to do much more than say they will help and stall you for a few months before saying no, sorry we can't help you. All the while you are sinking deeper in debt. Yes --they are supposed to help and no -- they aren't very good at it.

If you are already facing foreclosure you may seek first the Free HUD Counselors in Washington or you may seek professional help. First, share your Budget Form with your accountant or a family friend and put some ideas on the table.

Call a FREE HUD Counselor for starters: 1-888-995-4673.

I will say I have spoken with several HUD counselors and some are well trained and helpful. The only problem with their 'advice' if you can call it that is that once they determine you 'have a case' they will send you back to your lender to fend for yourself. If you are not very far behind, say less than 90 days in your mortgage payments- your bank may be able to help. Just don't count on it.

What you can count on is a long drawn out process. If you are more than 90 days behind on your payments and you have received a Notice of Default, your case has fallen into the 'loss mitigation department'. These are specialists working through a backlog of distressed cases on behalf of the lender. Just remember, they represent the bank and not you. In fact, they really don't want to speak with you at all. They simply cannot handle your angst and get their job done.

If you feel you need outside help, below are some resources:

Home Foreclosure Legal Aid Project: If you cannot afford a lawyer, this project is a partnership with the Washington State Bar and the Northwest Justice Project: 1-877-894-4663

Office of the Comptroller of the Currency
Homeowners may register complaints regarding their national banks here for investigation. 

Congressional Representatives Your elected officials need to hear from you and may offer resources and assistance at both state and federal level

Washington State Department of Financial Institutions Hotline:
Homeowners may register complaints about state banks and modification agents as well as tips on how to proceed if you are facing foreclosure:

Please note: It is best to seek the services of professionals with a demonstrated track record and expertise in their specific fields. We refer to trusted local colleagues in the areas of debt restructuring, bankruptcy law, accounting, loan modification, short sale negotiation, real estate sales and credit restoration. Our primary business is mortgage financing.

To your future prosperity!

© 2010 susan templeton
*Susan Templeton is not a loan modification advocate

Sunday, August 22, 2010

Bouncing Back from Short Sale or Foreclosure

Homeowners who have suffered a Short Sale or Foreclosure are advised to develop a recovery strategy from the day you decide to negotiate your settlement terms with your bank. The fact you have failed on a financial obligation, on the face of it, is an agreement to move forward with you life. Congratulations. Take a deep breath!

You may be able to qualify for an FHA home loan as your fastest track back to homeownership sooner than later. FHA currently has no minimum credit score, although most lenders do have their own underwriting overlays on what they will accept. 620 FICO is the starting point for most.

What about timing?
The clock starts ticking in your favor the day your home title is transferred to a new owner. NOT unfortunately, the date your foreclosure is registered. Since Short Sales keep you on title throughout the process, you could be putting off home ownership however long it takes to settle your sale. If you were able to keep making your payments or miraculously did not have months of ‘late payments’ pile up on your credit you could theoretically apply for a new mortgage right away. How an underwriter views your situation is very much up to your complete presentation and their investor's particular requirements.
FHA could be your ticket!
FHA Loans, the flagship of HUD (US Housing and Urban Development) are the most lenient with general underwriting compared to conventional lenders largely due to the government insured mortgage insurance paid for by the homeowner.

NOTE page 2 of the below HUD FHA Mortgagee Letter of December 2009. This outlines the ability of a Borrower to apply for an FHA insured Mortgage following a Short Sale of a previous property. (It is likely these standards will be revisited as they often are!)

“Borrowers are considered eligible for a new FHA-insured mortgage if
• they were current on their mortgage and other installment debts at the time of the short sale of their previously owned property, and
• the proceeds from the short sale serve as payment in full.”

Both situations above are rare if your short sale lags more than 90 days. More commonly:
“Borrowers in default on their mortgage at the time of the short sale (or pre-foreclosure sale) are not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale. Lenders may make exceptions to this rule under certain circumstances.”  

What about Conventional Loans?
Traditionally, Conventional Loans, i.e., those sold to Fannie Mae and Freddie Mac have pretty strict guidelines (now) that you won't really be considered 'fundable' for seven years after a foreclosure. This varies widely in practice!

If you live in a rural area or are a US Military Veteran:
USDA and VA usually defer to the HUD guidelines with some exceptions, usually established by the lending institution on a case by case basis. VA will officially consider a borrower after 2 years  from Bankruptcy or Foreclosure and with some exceptions possibly sooner. These organizations are essentially charged with sponsoring home ownership for people needing assitance with no down payment. Search USDA properties:  

Don't fall for: "Short Sales have less effect on your credit"
This is a popular real estate myth! For anyone considering enduring months and months waiting for their home to sell as a distressed short sale; please understand: essentially a foreclosure or short sale has very similar effects on your credit. After 120 days the ‘lates’ register on your report with the same effect as a foreclosure. Since on average a short sale takes from 6 to 13 months imagine that month after month your credit continues to tank with each successive late and each late is fresher and fresher. Recent negative impacts have more effect than older ones. Your score can only start recovering when you do and the late payments stop. NOTE: one 120 day 'late' entry for a mortgage payment can have up to 130 -200 pts immediate negative effect on your score. Credit scores go down lke a rock (fast) with any negative impact and up like a feather in recovery mode (slow).

Bank Ratings on the Short Sale Process:
HousingWire magazine recently rated banks for their short sale negotiation timing. Surprisingly, some banks took over 13 months on average. Of course many of the larger banks inherited their bad porfolios so they had help getting the worst rating. Another bank rated at the top of quick negotiators at 6 months on average was previoulsy rated as a predatory lender. This turn of events for 'tough banks' becoming quick negotiators may be a direct proportion to the amount of Federal Reserve TARP money they have put to good use rebuilding their staff levels and bottom line.

Build a Credit Recovery Strategy!
More on rebuilding your credit after a Short Sale or Foreclosure on our other blog:

To your prosperous future! equitytalks

© 2010 susan templeton
*Susan Templeton is not a loan modification advocate