Underwater Mortgages: Is Walking Away or Doing a Short Sale Your Best Option?

Underwater Mortgages-Is Walking Away or Doing a Short Sale Your Best Option-150x150After the recent housing market meltdown, many home owners have found themselves underwater on their mortgages. Being underwater means that they owe more on their homes than the homes are worth, making it difficult to keep making mortgage payments. Knowing that you are paying significantly more for your home than what the home is worth feels like throwing money away and the majority of home owners will probably choose to get rid of the home instead of making payments for several more years. Having to abandon the home that you have created memories in can be very unpleasant for the whole family, but it is probably a better choice than throwing money out the window.

The problem with being underwater is that you practically have two choices that will get you out of this situation: you can either walk away from your home, in which case the lender will foreclose on it, or sell it for less than it was originally worth at a short sale. Both of these options have serious consequences, and there is no way around them, but you probably want to know which one is the better choice, which one will create less problems for you than the other.

Differences Between Walking Away and Doing a Short Sale

Several parts of your financial life will have to suffer as a consequence of both walking away from a home and doing a short sale. The most affected will be your credit score, and this is where doing a short sale seems to beat walking away from a home and having it go into foreclosure. With a short sale, the lender hopes to recuperate most of the amount that you owe him, and to avoid going through the lengthy and expensive process of foreclosing. Here are two main differences between walking away from a home and doing a short sale, and how they will affect you.

  • Your credit score. Walking away from your home will result in foreclosure, which will have a large negative effect on your credit score. Foreclosures typically remain on a credit report for up to 7 years, making it next to impossible for you to take out another mortgage loan and buy a new home. Short sales will also be added to your credit report, but worded as “settled for less” or something similar. Lenders prefer to recover some of the debt by doing a short sale instead of foreclosure, which takes a long time and is expensive. Your credit score has less to suffer when doing a short sale and it will be easier to recover, in only a couple of years.
  • Your ability to buy a new home. When walking away from your home, you can buy a new home after 5 years have passed, but with several restrictions, like making a larger down payment and paying a larger interest rate. After 7 years, the black spot on your credit report goes away and you are able to buy a new home without these restrictions, as long as everything else is in order. You can buy a new home right away after doing a short sale, as long as you haven’t missed any payments on your previous mortgage and the lender doesn’t require that you pay back the remaining amount. However, finding a lender that will give you a mortgage loan in this situation is very difficult.

Doing a short sale seems to be the better choice between the two, but there are many factors to take into consideration before you can decide. However, your credit score is probably the most important factor, so choosing to do a short sale over walking away from your home is probably the best option in most situations.

Divorcing and Have an Underwater Mortgage? Options Here!

Divorcing and Have an Underwater Mortgage-Here's What to Do- 150x150Divorce is an unfortunate situation to be in, and you probably want to get it over with as soon as possible. Unfortunately, if there’s also a home with an underwater mortgage involved, things can get even messier. Statistics say that around 50 percent of all marriages in the United States end in divorce, and more than 20 percent of all homes are underwater, so divorcing when you have an underwater mortgage is a pretty widespread problem.

Normally, when a couple divorces, the home is either sold and the money split evenly, or one of the spouses keeps the house and the equity in it will count toward their share of the assets. This is what happens when there is equity in the home, meaning that the home is worth more than when it was purchased. In case of an underwater mortgage, the home is worth less than when it was purchased, and the home has negative equity. This means that the home is not an asset anymore, but a liability, and it is much harder to decide who gets the home or how the debt will be split. Here are some solutions to divorcing when you have an underwater mortgage.

Refinancing

Refinancing is expensive and there’s a chance that you will be denied in your situation, but, thanks to government programs, such as the Home Affordable Refinance Program (HARP), you still have a chance to refinance your home, even if your mortgage is underwater. The best way to take advantage of this program is to refinance the mortgage under the name of only one of the spouses, then making changes to other aspects of the divorce in order to reflect the financial liability that the spouse who is refinancing is taking.

Lenders are reticent when it comes to refinancing if one of the borrowers is taken off the mortgage, even if it’s through the Home Affordable Refinance Program. You will have to make sure that the spouse who refinances has enough income to continue paying the mortgage by himself or herself.

Foreclosure

This is the easiest way of dealing with an underwater mortgage when divorcing, but it’s also the solution that will leave the biggest black spot on your credit report. Typically, a foreclosure will stay on your credit report for up to 7 years, making it hard for you to get another mortgage loan. The foreclosure process also takes a long time, which means that it will take that much longer to repair your credit score.

If you remarry after your divorce, and your new spouse has a good credit score, you could get a new home using their credit, but you will most likely be unable to contribute to paying the mortgage with your income.

Short Sale

In order to sell your home for less than what you owe on your mortgage, you will have to convince the lender to allow a short sale. Lenders usually agree to a short sale when it is clear that the borrower is unable to keep making mortgage payments, which may be the case if the income from both spouses was used to make mortgage payments.

The lender might not agree to a short sale, and hold both spouses liable even if they are divorced. Also, a short sale will have a significant negative impact on both of your credit scores, and it will most likely take several years until you will be able to recover from this hit and have a good credit score again.

Deed in Lieu of Foreclosure

Another option would be to simply return the home to the lender, if they agree. You lose the home, but won’t be held liable, like you would with a short sale. This is a win-win situation, because your credit score won’t take such a big hit from a deed in lieu of foreclosure, and your lender avoids the high cost of foreclosing your home.

Another option would be to continue living in the same home with your spouse while still divorcing. This is often a bad idea for both parties involved, but if you can pull it off until you can refinance or sell your home without losing money, then you should take it into consideration. Divorce is a bad experience, and adding an underwater mortgage to that will make it even more of a mess, but there are ways of dealing with this situation that will help keep more money in your pocket.

Home Affordable Foreclosure Alternatives Program – What You Need to Know

Home-Affordable-Foreclosure-Alternatives-150x150Not being able to afford your mortgage anymore can be a stressful experience. Knowing that you will eventually have to abandon your home and move again is not pleasant, especially knowing a foreclosure will leave a large black spot on your credit report. Fortunately, the Home Affordable Foreclosure Alternatives (HAFA) program offers home owners who are facing imminent foreclosure two options, which can make this experience more bearable. HAFA helps home owners who are eligible by providing protection and money if they decide to do a short sale or Deed-in-Lieu of foreclosure.

The Home Affordable Foreclosure Alternatives program is designed to help borrowers and their lenders to work together to avoid foreclosure. Lenders, like home owners, want to avoid foreclosure, because it’s a long and expensive process. The alternatives to foreclosure that HAFA offers are much more attractive for both parties involved.

Benefits of Home Affordable Foreclosure Alternatives

The HAFA program gives home owners the chance to avoid foreclosure by performing a short sale, which means selling the home for less than you owe to your lender, or giving the home back to your lender, known as a Deed-in-Lieu of foreclosure. Here are the most important benefits that this program offers:

  • After completing a short sale through HAFA, you will be free from your mortgage debt, unlike when you perform a regular short sale. The difference between what you owe and what your home sold for will be waived.
  • After closing, the Home Affordable Foreclosure Alternatives program may offer you $3,000 in relocation assistance, if you are eligible.
  • You are entitled to free advice from a professional, such as a HUD-approved housing counselor or a licensed real estate agent.
  • Lenders work with you to determine a good short sale price and are required to let you try to sell your home through a short sale or accept a Deed-in-Lieu of foreclosure before foreclosing on your property.
  • When using the HAFA program, your credit score won’t take as big of a hit as it would if you did a conventional short sale.

HAFA Eligibility Requirements

The first step to qualifying for the Home Affordable Foreclosure Alternatives Program is to apply to HAMP, Home Affordable Modification Program. In order to qualify for the HAMP program, you will have to meet the following criteria:

  • The home must be your primary residence.
  • Your mortgage must have originated before January 1, 2009.
  • The mortgage loan amount must be less than $729,750.

If you don’t meet the qualification criteria for HAMP, then your best choice is finding a short sale agent to assist you. If you are eligible for HAMP, it doesn’t guarantee that you will qualify. However, if you want to do a short sale, then being eligible but not qualifying is good news. If you are eligible, but the Home Affordable Modification Program turns you down, then you can qualify for HAFA. You can also get accepted into HAMP, but stop making mortgage loan modification payments in order to be able to apply for HAFA.

You can find out if you qualify for the Home Affordable Foreclosure Alternatives program by simply speaking to your lender. Foreclosure is hard on your lender as well, so they will try to avoid it and give you other options. Fortunately, the government is also willing to help through programs like HAFA, which are designed to help you get through a difficult period of your life much easier.

The Three Techniques You Need to Master in Real Estate Investing

The Three Techniques You Need to Master in Real Estate Investing- 150x150Many industries have suffered due to the recent economic recession and are currently slowly recovering. One of these industries is real estate, which is not as profitable as it once was, but remains an attractive industry for investors. Real estate, like many other industries, has recently started to show improvement, and it looks like it will keep improving over the next years.

For someone with less experience and knowledge, real estate may seem like a pretty difficult industry to invest in, especially during these times. Fortunately, by learning a few techniques, any investor who possesses the right determination can make it in this business. In this article you will find the three main techniques that you need to master in real estate investing.

Technique Number 1: Find Rent-to-Own Homes for Home Buyers

A good alternative for people who are unable to get approved for a mortgage loan is the lease purchase. This gives the tenant the option of buying the home that he is renting, but at a later date.

A fairly large number of potential home buyers are unable to obtain a mortgage loan, due to loan requirements becoming stricter. This has created a large number of people and families who are renting because they have no other choice. Lease purchase gives them the option of purchasing the rental before the lease term is up, and even the possibility of allowing part of each rent payment to go towards the purchase price. This is a great opportunity for those who are unable to get mortgage financing, and for the real estate investor.

Because of the housing market being in recovery, you have a significant number of homes that won’t sell because sellers won’t budge on the price. Additionally, there are a significant number of people looking to buy, but can’t qualify for loans. In order to make a profit, you must find a seller willing to agree to a lease purchase option, and then find him a tenant buyer. Bringing the two together will resolve both their problems and get you a nice commission. Because both the seller and the buyer are motivated to move quickly, the transaction shouldn’t take more than a few weeks to finish.

Technique Number 2: Investing in Foreclosures

You could make huge profits from investing in foreclosures, but if you don’t have the proper knowledge, a single bad investment can wipe out all of your capital, along with ambition to invest in real estate.

There are three ways in which you can buy homes in foreclosure: pre-foreclosure, at the auction, or buying from the lender after the foreclosure. Buying a foreclosed property from the lender after the auction is referred to as buying REOs (real estate owned), and it’s the less risky option of the three. The next riskiest time to purchase a property is pre-foreclosure, because the home can have many issues that the seller didn’t disclose. The riskiest purchase is buying a foreclosed property at the auction. You won’t receive any warranty or guarantees that the home is free of any outstanding liens or loans.

The best way to buy a foreclosed property is to find a good REO agent that has the necessary experience to make sure that the transaction goes smoothly and you get a good deal. Sometimes, real estate agents who are specialized in REOs have a few foreclosure listings that need to be sold fast, so they will be searching for an investor who can make the purchase quickly. If you have good relationships with a real estate agent, the first person he calls could be you, helping you secure a good deal in a short time.

Technique Number 3 – Buying Short Sale Properties

Many home owners who have found themselves underwater on mortgage loans might require a short sale. This is a great opportunity for the real estate investor to make some serious profit.

You can negotiate a good price with the homeowner or with the short sale lender, buy the home, and then flip it for a profit. Like in the case of foreclosure investing, finding a good real estate agent can make a huge difference. The agent can locate properties for you, help you with your investment plan, and help you negotiate a better price.

These three real estate investing techniques can make you very successful if you use them wisely. You must remember that not all properties that seem like a good deal are worth investing in. Familiarize yourself with these techniques, with the investing process, and don’t be afraid to consult a real estate agent. Even if you have done your homework, agents have the necessary relationships to help you find great deals faster than other investors, and get you one step closer to becoming a great real estate investor.

Avoid Making These Big Mistakes as a Short Sale Investor

Avoid Making these Big Mistakes as a Short Sale Investor- 150x150Investing in short sale properties can be a great way of making a profit in a fairly short amount of time. With the housing market slowly recovering after the big hit that it took during the recent recession, there are still plenty of homeowners who are underwater on their mortgage loan, and their best option is a short sale. Hundreds of thousands of homes are on short sale lists, giving real estate investors a great opportunity to make a significant amount of money.

Unfortunately, many of these short sale and foreclosed properties come with issues, which can cause expensive problems for some real estate investors, especially for the ones who are just starting. Damage that is undisclosed by the seller or undetected during the home inspection can end up costing you tens of thousands of dollars, putting an end to your career as a real estate investor before it even started. In this article, you can read about the biggest mistakes that a short sale investor can make.

Top 5 Biggest Mistakes

Mistake #1 – Being in a Hurry to Make Some Quick Cash

Theoretically, investing in short sales is a pretty fast way of making money, but it is an investment, after all and, like most investments, it requires patience and preparation. Rushing into an investment and expecting to quickly make some cash can lead you into making some serious and costly mistakes. As a short sale investor, you should hope for the best, but be prepared for the worst, meaning that you do your homework beforehand and are able to efficiently take care of any problems that may come up.

Mistake #2 – Not Keeping Your Options Open

Not every short sale will go through, so, even if you think you have found the perfect deal, keep your options open, as a better deal could be just around the corner. With such a large inventory of foreclosed and distressed homes, focusing all of your energy and money on a single property is not the most profitable move.

Mistake #3 – Not Following Short Sale Deadlines

The short sale process follows some pretty strict deadlines, so not being able to follow them can result in you losing that deal. Make sure that you have everything ready in time, from paperwork to scheduling the home inspection. Starting all of the necessary proceedings early, such as the loan pre-approval or home inspections, makes it easier for you to follow short sale deadlines and deal with delays.

Mistake #4 – Not Doing a Home Inspection

The few hundred dollars that you have to spend on a professional home inspection are not worth the thousands that you will have to spend later if the house has serious damage. Simply because the outside of the house looks good doesn’t mean that it is in a good shape. Unseen problems like roof or foundation damage can be very costly to repair, and possibly leave you with no profit at all. Pay close attention to all of the details and get a comprehensive insurance policy from the home inspector.

Mistake #5 – Paying too Much

Short sale investing is normally a sure way of buying a home cheaper, but that’s not always the case. A mistake, like overpaying when investing in real estate, can put you out of business or end up being just a waste of your time, in the best case scenario. Do your homework before investing your money and find out how much similar properties have sold for in the area in the past few months.

Real estate short sale investing is a good way of making a profit for a knowledgeable investor, who takes the time to research not only the whole real estate investing process, but also the properties that he or she is investing in. It is hard to recover from mistakes in this business, so make sure that you don’t end up having to look for another job or even worse, broke, because you haven’t paid attention to all of the details that short sale investing involves.

How These Alternatives Can Help You Avoid Foreclosure

How These Alternatives Can Help You Avoid Foreclosure- 150x150Going into foreclosure can happen for various reasons, such as money problems, divorce, or job loss, and it is never a pleasant experience. However, there are several alternatives that can help you avoid foreclosure, and they are generally considered a better substitute to losing your home.

What is Foreclosure?

Foreclosure happens when a borrower cannot make monthly payments on his or her mortgage loan anymore. This leads to the property being taken by the bank and sold.

Foreclosure involves several stages: after 3 to 6 months of missed mortgage payments, the lender notifies the borrower that he or she is facing foreclosure. This is done through a Notice of Default. A reinstatement period begins, in which the borrower has a chance to correct the default. If the borrower can’t correct the default, he or she will receive a Notice of Sale and the property is listed in a public auction. The winner of the auction will gain possession of the borrower’s property.

Alternatives to Foreclosure

Before you give up and accept that you are going to lose your home, you should know that there are alternatives to foreclosure. In order to determine what your best alternative is, you must discuss this with your lender. By contacting your lender as early as possible, you will have access to more options. Here are some of the alternatives to foreclosure that you could take advantage of:

  • Bankruptcy. Bankruptcy offers individuals the chance of a fresh start by forgiving debts that they are unable to pay, while giving lenders the chance to recover some of their losses through the debtor’s assets. Bankruptcy can become a very expensive process, and it’s recommended that you consult a professional before choosing this option.
  • Reinstatement. If you are able to repay the missed monthly payments, you could make your mortgage loan current, which will help you avoid foreclosure. This alternative is valuable if you use it early on, because you won’t have that many missed payments. Reinstatement can be very helpful if you are recovering from a short-term money problem, and can show the lender that you can repay what you owe and start making monthly payments on time. Be aware that you will most likely have to pay late charges and penalties.
  • Refinancing. Refinancing may be able to reduce your monthly payments by securing a lower interest rate than your current mortgage rate. You are required to be current on your monthly payments and have a fairly acceptable credit score in order to qualify for refinancing. You may also be able to qualify for refinancing through the Home Affordable Refinance Program (HARP).
  • Forbearance. When facing money problems, your lender is able to grant you a “forbearance,” meaning that your monthly payments will be put on hold for up to 6 months, giving you time to get back on your feet. In many cases, forbearance is combined with reinstatement, in order for you to pay the missed monthly payments on your loan, once your financial situation has improved. Forbearance may be extended for another 6 months in case you are unemployed.
  • Repayment plan. If you are a few months behind on your mortgage payments, you may also qualify for a repayment plan. The missed payments and late fees are combined with your regular monthly payments. However, you must be able to prove to your lender that you can afford to pay the past due amounts, and start making monthly payments on time.
  • Short sale. When selling your home through a short sale, the property is put up for sale, and sold for a price that is less than what you owe to your lender. After the sale is completed, you will have to negotiate with your lender to accept the sale price as payment in full. This option will still damage your credit, but, if you are successful in convincing the lender to accept it, you won’t owe anything anymore, unlike foreclosure.
  • Renting. While this option has nothing to do with your lender, you will need to rent the property for an amount that will cover your monthly mortgage loan payment.

Almost all of these options will affect your credit negatively, and are not ideal, but they are better alternatives than losing your home. But this doesn’t mean that you should just go ahead and pick one blindly, without knowing what it involves. Having knowledge about all of the alternatives that are available, how they work, and how they will impact you, is very important and should be thoroughly researched.

How a Short Sale Works

ShortSale-150x150If you owe more on your mortgage than the current value of your house, then you may want to look into a short sale as an option. When you are having financial problems and you want to try avoiding a foreclosure, the alternative is a short sale. Unfortunately for either option, the consequences are grave: destruction of your credit score, loss of personal dignity, and possibly embarrassment for your family members. Sometimes this is your only option so you just have to proceed and push through the discomfort of the situation.

All About Short Sales

Many realtors are reporting that they are having more short sales compared to any other sales in the last 5 years. This sad fact highlights the depressed economy and the many Americans struggling with debt. Even non-delinquent sellers are qualifying for short sales these days.

When a lender agrees to a real estate short sale, the lender is basically accepting an amount less than the total due. But not all lenders accept discounted payoffs or short sales, especially when a foreclosure will mean more financial recovery for them. It is also important to note that not all properties or sellers qualify for a short sale arrangement.

Honestly speaking, there are some drawbacks to short sales with the parties involved. All borrowers are advised to:

  • Know the type of loan involved. This influences flexibility in negotiating for an offer.
  • Seek legal advice. Find a competent and registered real estate lawyer in your state.
  • Find out about taxes. Ask an accountant about taxes associated with short sale transactions.
  • Meet deadlines. Be aware of all of the deadlines and stay on top of them. Not following the timeline could potentially ruin a short sale, so it is important to stick to dates throughout the process.

According to the Mortgage Forgiveness Act of 2007, the IRS will not consider debt forgiveness as income per se. There is no guarantee as to whether a lender that accepts a short sale will legally pursue the borrower for the difference unpaid. This amount is referred to as a deficiency in some states. Given the prevailing laws, a lawyer may be required to determine whether you actually qualify for a claim or deficiency judgment.

Steps to a Short Sale

1.    Contact the lender.
Before finding a short sale specialist, you will have to make several calls in order to find the right person. You will hopefully be able to establish rapport with the lender and make sure that the lender has you in their best interest.
2.    Submit a letter of authorization.
Lender etiquette says not to disclose any personal information about their clients unless there is express permission to do so in writing. It would be much better if you directly speak to the lender and endorse the lawyer or agent representing you. This letter contains your name, the loan reference number, the property address, the date, the name of your agent and their contact details.
3.    Prepare the net sheet.
A net sheet is an estimated closing statement which indicates the selling price that is expected along with the costs of sale, outstanding payments, unpaid balances, and any real estate commissions. You don’t have to stress remembering every detail in preparing this because your lawyer or agent should be able to do this on your behalf. If the net figure indicates some cash then you may discover that you don’t really need a short sale.
4.    Obtain a hardship letter.
This letter is meant to hit the nail on the head. It clearly describes what happened that led you to your financial disability. In this letter, you are pleading with the lender to accept less than the amount due. You need to explain that you were ill, lost your job or had your family involved in an accident. However, you must be honest because criminal behavior and dishonesty may only lead to prosecution.
5.    Provide proof of assets and income
Honesty about your income and assets is paramount in one’s attempt at a successful short sale. You should clearly relay information pertaining to your negotiable instruments, real estate property, money market accounts, savings accounts, and stocks to the lender. This is considered assurance that you will not be able to repay.
6.    Provide bank statements.
The lender wants to be convinced of your financial misfortunes by all means. That’s why you need to explain any unaccountable deposits, unusual number of checks or huge cash withdrawals on your bank statement. This will enable the lender to determine whether any deposits will actually continue.
7.    Conduct a comparative market analysis.
A comparative market analysis enables you to substantiate that the value of your property has dropped because of a market decline. It should indicate the prices of similar homes that have been sold in the past 6 months, the ones being sold currently and any pending sales. Your agent can prepare this document on your behalf.
8.    Strike a purchase agreement.
If you come to an agreement for selling, then you should provide the lender with a copy of that offer. If you had listed it, then the listing agreement should be there too. However, the lender may refuse to make certain payments such as home protection claims and the cost of inspection on the property.

If all goes well, the lender will most likely approve your bid. You may also request that the lender not report adverse details about you to credit agencies given your present financial difficulty.