Foreclosure Prevention (FAQs)
For Foreclosure help please contact
Keyna Samuel at 617.825.4224 x 134
Q. What is a Mortgage?
A. A legal claim received by the lender on a property as security for the loan made to a buyer to facilitate the purchase. Typically, a mortgage payment must be made monthly to keep the mortgage loan from falling into default.
Q. What is foreclosure?
A. Home foreclosure is a process in which a lender reclaims a property which they have financed. This normally occurs when the borrower or homeowner is behind on mortgage payments and is unable to become current. This generally is due to circumstances beyond the homeowner's control. When foreclosure takes place, the homeowner must vacate the home forfeiting possession of the property and risking any possible equity. The time frame in which the foreclosure process takes place varies from state to state. Click http://www.uslossmitigation.com/foreclosure.php to review foreclosure laws state-by-state.
Q. How does foreclosure happen?
A. There are a many circumstances that can cause homeowner to face foreclosure. Generally, a hardship occurs that results in a homeowners inability to keep up with their mortgage payments. These reasons may include:
· Loss of job
· Divorce or separation
· Unplanned home or car repairs
· Filing for bankruptcy
Q. What is Loss Mitigation?
A. Simply put, is a process that uses various programs and techniques to avoid foreclosure. Foreclosure is a last resort option and should be avoided whenever possible. Through numerous programs, loss mitigation provides a means to stop foreclosure and keep people in their homes. Loss mitigation assistance generally falls into two categories. The first will remedy the default and retain homeownership. The second results in the sale of the property to a third party by means of voluntary relinquishment; however, not a foreclosure, which should be avoided if at all possible. Foreclosure severely damages an individual's credit.
Q. What does a Loss Mitigation Counselor do?
A. A loss mitigation counselor examines a homeowner's scenario to determine the most viable loss mitigation program to assist the homeowner resolve their mortgage issues. The counselor will guide the homeowner and develop the case to determine the appropriate qualifications and direction to assist the homeowner. After the counselor has collected all supporting documentation to support the case he will present the case to the homeowner's lender to resolve the situation in the most suitable manner.
Q. What are the Loss Mitigation programs used to avoid foreclosure?
Homeowners that face permanent financial crisis through death, divorce, or permanent disability are less likely to be able to afford the monthly mortgage payment will have limited options. These options generally involve a Short Sale (Pre-foreclosure Sale) or a deed-in-lieu of foreclosure. However, homeowners that are facing a temporary setback but will be able to continue making the monthly mortgage payments in the future should qualify for additional options that may include: forbearance, loan modification, mortgage refinancing, and additional loans against the home to cover the cost of default.
There are six options for conventional loans and there may be additional programs if backed by Fannie Mae and Freddie Mac. Options 1,2,5 and 6 are generally the same as FHA loss mitigation options.
Retention Options (homeowner remaining in subject property)
2. Loan Modification
3. Mortgage Refinancing: Mortgage refinancing is an option where the lender would allow your client to refinance his or her existing mortgage, wrap in any late payments and fees, and cash out part of the equity in the home to allow the homeowner to regain control of a debilitating financial situation.
4. Second Mortgage: A lender may offer a second mortgage to a homeowner in order to make up any back payments, late fees and other charges necessary to reinstate the loan. The homeowner, in return, will be required to make an additional mortgage payment to cover the principal and interest payments on the second loan. Interest rates often rival credit cards and should be looked at with caution.
Non-Retention Options (homeowner relinquishing the property by means other than foreclosure)
5. Short Sale (Pre-foreclosure sale)
6. Deed-in-Lieu of foreclosure
FHA Program Options
There are five options outlined for FHA-backed mortgages where a homeowner is facing foreclosure. Three of these options, referred to by FHA as “retention options”, are available to help your clients that are facing temporary causes for default.
1. Special Forbearance- where you assist the homeowner by arranging a special repayment plan.
2. Loan Modification- where the mortgage is refinanced or the term of the loan is extended to accommodate a lower payment.
3. Partial Claim- an interest-free loan from HUD to bring the mortgage current.
The other two options, referred to as “non-retention options”, are designed to assist your client in the transition to lower cost housing.
4. Pre-Foreclosure Sale- entails selling the property prior to a foreclosure at Fair Market Value.
5. Deed-In-Lieu of Foreclosure- voluntarily giving the property back to the lender.
Though FHA does not have a litmus test to determine if a delinquent client’s situation qualifies for a particular option, FHA relies on the lender and/or the loss mitigation counselor to determine a homeowner’s eligibility. These eligibility requirements include type of hardship, the status of the property, and the evaluation of the client’s situation. Most lenders do not discuss the qualifying factors to a homeowner, which puts the mortgage company at an unfair advantage. As a loss mitigation counselor you create an even playing field for your client; in most cases tipping the scales in your client’s favor.
It needs to be determined whether the FHA homeowner’s ability to support the mortgage debt has been permanently reduced. If the homeowner doesn’t have the means to pay the mortgage, they are likely to only qualify for a non-retention option. However, if the crisis is temporary in nature, such as loss of income or illness, the homeowner will more likely be considered for FHA retention options.
FHA RESIDENCE POLICY
The FHA loss mitigation policy requires that the homeowner must occupy the property as a primary residence in order to be eligible for any reinstatement options. Exceptions to this rule can apply when the non-occupancy is due to the hardship that got them behind in their mortgage payments and can be proven to have forced the homeowner to move. Furthermore, the client must not own any other real estate that has a FHA loan against it or had a FHA loan that incurred a loss as a result of a foreclosure or forced property of sale. If a property has been abandoned, a FHA homeowner is not eligible for any reinstatement options. In most cases of abandonment, foreclosure proceedings are initiated instantly.
Critical to determining your client’s eligibility is the lender’s analysis of the client’s financial situation. A homeowner will be expected to provide detailed financial information to the lender and the lender will be required to independently verify the information.
FHA PROGRAMSIf the cause of your client’s default or delinquency is one that poses a temporary setback and if the client will have the ability to continue making the regularly scheduled mortgage payment, FHA prefers the lender considers retention options in the following order:
1. Special Forbearance
2. Loan Modification
3. Partial Claim
If the loan is not curable and/or the homeowner is not willing to remain in the home, the lender is to consider non-retention options with a preference towards the following order:
1. Pre-Foreclosure Sale (Short Sale)
2. Deed-in-Lieu of Foreclosure
The first option to evaluate your client for is a Special Forbearance option. According to FHA’s loss mitigation policy, “A special forbearance is a written repayment agreement between the lender and a mortgagor [homeowner] which contains a plan to reinstate a loan that has been delinquent for at least 90 days.” Generally a lender will accept workouts you have done on a special forbearance plan for a homeowner through lower payments over a period of time in order to compensate for the unexpected loss of income or increase in living expenses. Special forbearance can also be an increase in mortgage payments over a period of time to bring the mortgage current. In order for your clients to qualify for a special forbearance, you, the Loss mitigation Counselor must prove that the client can meet the following guidelines:
· At no time may the mortgage be behind more than the equivalent of the total of 12 months of mortgage payments (to include principle, interest, tax and insurance).
· The special forbearance must lead to the reinstatement or resumption of the loan by either gradually increasing the monthly payment in order to cover the money owed or the resumption of normal monthly payments. Furthermore, the loan must be between 3 and 12 months behind.
· Your client must be an owner occupant and continue to occupy the property as a primary residence during the term of the forbearance.
· You must show your clients will have sufficient income to reinstate the loan. This may be accomplished through the gradual repayment of the amount owed or through a combination of a partial claim.
· The property must be habitable with no adverse conditions that would prevent the homeowner’s continued use or the property’s marketability.
A loan modification is a permanent change to the mortgage note that restructures the terms of the loan in order to reinstate the loan and results in a payment your clients can afford to make. Examples of a loan modification would include lowering the interest rate, extending the due date on the loan, or re-amortizing the remaining balance on the loan.
In order to modify the mortgage, your client must:
· Be three or more months behind in payments,
· Have had the mortgage for at least 12 months,
· Not in foreclosure,
· Prove the loss of income or increase in living expenses,
· Live in the property as an owner occupant and continue to live in the home as a primary residence
Furthermore, the mortgage company has to do a loan modification that must result in a fixed rate loan that reinstates the loan. At the lender’s discretion, the interest rate may be set below market or increase the rate if your client has the ability to support the payment. The lender is also allowed to include any or all of the back payments into the principal amount. Any foreclosure costs, fees, and other administrative expenses may not be included into the modified loan.
It is important for the Loss Mitigation Counselor to make sure their client is making payments in the amount of their mortgage payment to ALMC in the Virginia trust account that can be used to pay the foreclosure cost and other administrative expenses. It is also important to make sure that the workout package is submitted results in the best possible plan for your client. Usually you will delay filing, to allow your client ample time to save up money in the trust to pay the costs that will not be included in the retention options. This is usually one of the reasons homeowners who attempted to represent themselves fail and lose their homes.
A partial claim is a no-interest loan form the government that covers the amount necessary to reinstate a delinquent loan. Your client does not have to make payments for this note nor does the note become payable until your client either pays off the FHA loan or no longer owns the property.
In order to qualify for a partial claim, you must:
· Be at least 4 months but not more than 12 months behind in the mortgage payments,
· Not be in foreclosure,
· Have recovered from the cause of the default,
· Have sufficient income to resume the monthly mortgage payments,
· Not have sufficient income to repay the amount necessary to reinstate the loan,
· Occupy the property as an owner occupant and continue to live in the home as a primary residence,
The partial claim must fully reinstate the loan for your client. The partial claim may only include the principal, interest, taxes and insurance necessary to reinstate your loan. This does not include any late fees or other administrative costs associated with the delinquency. Though the partial claim is due when the FHA loan is paid off or when your client no longer owns the home, the partial claim does not carry a prepayment penalty.
Again make sure that your client continues to post his payments to the trust, to cover expenses not included in the reinstatement options. For example, a client is delinquent $2,700, and has incurred an additional $1,700 worth of foreclosure cost; only the $2,700 will be allowed in the retention options and your client will have to pay $1,700 up front. I would advise you always plan to file plans after your client has made their second payment, with the exception of clients that have scheduled foreclosure dates. If your client has a foreclosure date, it is imperative to inform them to have the amount of money needed (for your fees and down payment if needed), prior to accepting them as a client.
A pre-foreclosure sale allows your clients in default to sell the property, pay off the remaining balance of the loan, and collect any remaining equity while avoiding foreclosure. This option is generally used for your clients who face a qualifying financial crisis that requires the sale of the home. Clients whose property value has declined to less than the amount owed against the home are eligible for this option.
To qualify for this option, your client must make a commitment to actively market their home (with the use of a qualified real estate agent) for a maximum period of 4 to 6 months. During this time frame, you must make sure the lender is delaying any foreclosure action. The loan must be at least 30 days behind in payments and your client must be an owner occupant.
The lender is required to obtain a recent FHA appraisal and preliminary title report for the home. The property must not have suffered any severe damage and any repair costs must not exceed 10% of the “as is” value of the home.
Should your client owe more than the value of the home, you may get the lender to allow the buyer to sell the home for approximately 90% of the appraised value of the home, assuming that the appraised value is at least 63% of the amount owed. All sales contracts must be approved by the lender.
Failure to sell the home within 90 days of the expiration of the pre-foreclosure sale time frame, the lender will commence foreclosure proceedings, at that time it must be determined if an extension of time needs to be filed or to submit the lender with a deed-in-lieu of foreclosure option.
Deed-in-lieu of Foreclosure
A deed-in-lieu of foreclosure is a voluntary return of property, submitted for your client, by deeding the home to FHA in exchange for a release from all obligations under the mortgage. Your client facing eminent foreclosure against the home may voluntarily surrender the home to FHA in order to prevent the foreclosure. Generally this is the preferred to foreclosure because it avoids the time and expense of a legal foreclosure.
To qualify for this option, the loan must be in default. Your client must face a situation where he or she cannot continue to support the mortgage debt, and your client must occupy the home as a primary residence. Furthermore, the homeowner must not own any other properties subject to FHA financing.
It is advisable for a client facing this option to first consider the pre-foreclosure sale. By deeding the property over to the lender, your client loses all accrued equity in the home. Furthermore, should your client decide to select this option, he or she must complete the deed-in-lieu action within 6 months of the date of default unless an extension was granted by first trying other loss mitigation options or approval from the lender.
Should foreclosure proceeding occur, your client may still reinstate the loan by procuring sufficient funds to bring the loan current. In most states, this means you have until the last minute prior to the Trustee’s sale to reinstate the loan. See state foreclosure processes for the state that applies to your client, for specific timelines.
In order to qualify for one or several of the options listed above: your client must exercise his or her option(s) within the first 6 months of default. Exceptions to this rule apply if:
· The loan is reinstated
· Your client agree to a special forbearance
· The loan is modified
· The loan is reinstated by a partial claim
· Your client sells the property
· Your client deeds the property back to FHA
· The lender initiates foreclosure
An additional 90 days may be allotted if the lender has initiated but is unable to complete the special forbearance, loan modification or partial claim within the 6 months and no other intervening delays (such as bankruptcy) impede the process.
NEGOTIATING WITH FHA LENDERSAs a loss mitigation counselor prepares to work with his or her client’s lender, there are several areas to focus on before any interviews begin. As stated before, FHA relies on the lender to determine your client’s eligibility to include the type of hardship, the status of the property, and an evaluation of your client’s financial situation. A successful negotiation is determined by good preparation and good communication. In the outsourcing program, most of the preparation of paperwork and the negotiation is done by us, but the elements of the interview are important, so let’s discuss them.
When preparing for the interview, ask yourself the following:
For all types of mortgages- FHA, Conventional, FNMA, FHLMC
· Why did your client default on the loan? Is it a result of just not making the payment or has the client suffered a verifiable loss of income. Lenders will listen if you can prove verifiable and temporary setback in your client’s income. The key is being able to support your reasoning behind your client’s delinquency. If the reasons are due to temporary layoffs for example, send the lender a letter from your client’s employer stating that they have been laid off. If you do not plan carefully and file no reasons for being behind (or weak reasons), this may limit your client’s options.
· Have you cut back your client’s expenses appropriately? Does your client really need cable, or the BMW, when clearly they are facing the threat of losing their house? This expenditure analysis will be done by you and by the processors at ALMC in Virginia.
· Can your client sell an asset to compensate for the deficiency or loss of income? Does your client have any assets that they are forced to make payments on? Would selling that asset decrease the monthly expenses and/or generate sufficient cash to apply towards the loan for your client? In some cases a client may be able to sell a car, for example, to reduce the monthly expenses by eliminating the car loan. Also, any profits from the sale of the asset could be used to bring the loan current.
· Do your clients know anyone that could loan them money to get back on their feet? Do they have family members, relatives, or other sources that could loan them the money? Though most people are ashamed to ask, asking a family member or friend may be the only hope of saving the family home.
· Is it worth your effort or your client’s to save their home? Would it be advisable to have them seek advise on selling the home and giving them a fresh start? In some cases you will have to help your client realize that they may not be able to handle the burden and stress of keeping the house.
· Should you have your client seek legal advice on filing bankruptcy? When facing a financial crisis, some clients will often look towards bankruptcy as an option to alleviate the problems. Before your client makes a decision to file a bankruptcy, determine how it will affect your client’s ability to keep the home. Bankruptcy often delays the foreclosure, but statistically bankruptcies that involve real property often fail.
· If you were the lender, would you justify the cause based on your client’s situation? Though this is one of the most difficult questions to ask, be realistic. Inform your client, if they loaned someone $100,000 dollars, would they believe his or her excuse for being late? If not, you and your client might want to consider redrafting the hardship letter. Remember that the lenders prefer to hear about temporary setbacks versus permanent situations.
The lender will do a detailed analysis of your client’s loss mitigation package, once submitted. The lender will scrutinize the reasons for the default. The hardship letter needs to include all the necessary documentation to support the reason for the delinquency. Reiterate the need to gather all the applicable paperwork including letters from the employers showing a decrease in income, bills and receipts justifying an increase in expenses. These documents need to be readily available in the event that the lender requires additional documents to support your client’s claim.
The second key to successful negotiations with a lender lies in good communication. Good communication is achieved by quick action, immediate responses, and positive cooperation. I can’t stress this enough. Require clients to inform you if they are going to be late on their monthly postings. All the correspondence from the lender needs to be documented on their file. This allows us to track down the progress of the case.
Once the report has been sent and the representative for the lender has been identified the dialogue with the lender begins. You need to create a communication log as part of your client’s file, which will be used to document every phone call, letter received and meeting with your client. Furthermore, as the counselor you need to put emphasis on your client’s desire to resolve this mortgage problem. If the cause for the default has been resolved or will be resolved, it is your job to assure the lender that your client’s problems are behind him. This opens the doors for the lender to be more lenient and willing to work with you to bring a solution to your client’s problem.