San Diego Distressed Homeowner Expert, Short Sale, Loan Modification

Assisting Distressed Homeowners in San Diego

You are to be congratulated for your courage and dedication to finding the best solution for your circumstances. We provide you with information about how to avoid foreclosure, explain the effects it can have on you and your family, the and offer the options you decide on a course of action. The idea of losing a home can be overwhelming, and I feel it is vital for you to have all the facts necessary to make an informed decision.

Option 1: Reinstatement
Simply put it means paying all past-due installments of your loan and bringing the mortgage to a current status. This solution works best for homeowners who have substantial cash available to make up for their total past due balance, in addition to their regular mortgage payment. After being served with a Notice of Default, you have the right to fully reinstate your loan within 90 days.
      Pros: Does not require the mortgage company or lender's approval.
      Cons: Requires that a homeowner be able to pay all back payments, fines and fees.

Option 2: Forbearance or Repayment Plan
A forbearance or repayment plan involves the homeowner negotiating with the mortgage company to allow them to repay back payments over a period of time. The homeowner typically makes their current mortgage payment in addition to a portion of the back payments they owe.
       Pros: Allows the homeowner to make back payments over time.
       Cons: Requires that a homeowner be in a financial position to pay not only their current mortgage, but also a portion of the back payments owed.

Option 3: Loan Modification
This is a situation where you want to stay in your property, but can’t afford your current payment(s). The lender might renegotiate interest rates or reduce your payment and add it on to the backend of your loan.
       Pros: Reduces the payment a homeowner is required to make on a monthly basis.
       Cons: Requires that a homeowner 'qualify' for the new payment and will often require full documentation.

Option 4: Rent
You can rent your property out until the market turns upwards.
       Pros: Allows homeowner to keep property.
       Cons: Rent often does not cover the full cost of property ownership and maintenance.

Option 5: Deed in Lieu of Foreclosure
Another option is to simply move and give the home back to the bank. This is typically done through what is known as a “Deed in Lieu of Foreclosure”. Basically, you are giving all of your interest in the property to the lender in order to satisfy the debt.
      Pros: The lender will forego their right to a deficiency judgment.
      Cons: Requires that a homeowner vacate the property, and a deed in lieu may be reported to credit bureaus as a foreclosure.

Option 6: Bankruptcy
If the homeowner has non-mortgage debts that cause a shortfall of paying their mortgage payments and a personal bankruptcy will eliminate these debts, this may be a viable solution.
     Pros: Does not require lender approval.
     Cons: Bankruptcy can be costly, is damaging to credit scores, and can only be declared once every seven years.

Option 7: Short Sale
A short sale is where we will sell your home for less than what you owe. We need to negotiate with your lender(s) to accept less than what you owe. This typically requires the property to be on the market and the homeowner must have a financial hardship to qualify. Acceptable hardships include but are not limited to: mortgage payment increase, job loss, divorce, excessive debt, forced or unplanned relocation, and more.
   Pros: Click here
   Cons: Click here

Disclaimer: The information provided on website is not engaged in the practice of law nor gives legal advice. It is strongly recommended that you seek appropriate professional counsel regarding your rights as a homeowner.

Certified HAFA Specialist

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San Diego Bank Of America Distressed Home Owners Help

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Short Sale

HAFA Short Sale

Foreclosure VS Short Sale

California Foreclosure Timeline

Pre-foreclosure options

Short Sale Process

Short Sale Frequently Asked Questions

If you have questions that aren't answered here, feel free to contact us.

How do I qualify for a mortgage modification?

The first call you make should be to your lender, have the information above ready to discuss with them and call your customer service line to ask them what options you have available. If the person you speak with does not understand what you are asking, you can ask to be referred to one of the following departments (different lenders have different names for these departments):
1. Loss Mitigation
2. Mortgage Modification
3. H.O.P.E.
Prior to contacting your mortgage lender you can quickly complete an eligibility test at www.MakingHomeAffordable.gov.
This test will let you know if you are eligible for a modification through the government-sponsored Home Affordability and Stability Program (HASP). For a list of mortgage lenders and servicers, visit www.HopeNow.com.

What if I don’t qualify for a mortgage modification, can’t afford my home, and owe more than it’s worth?

If your mortgage lender or servicer will not work with you to reduce your payment, you may want to consider a short sale.

What is a Short Sale?

A Short Sale is the sale of a home when sales proceeds do not fully pay off the existing loan(s) and lender(s) accepts a discounted payoff to fully satisfy
the loan. The best part, the existing lender pays virtually all sales costs, including commissions, escrow and title fees and repair costs. You get your home sold, the loan(s) paid off and you avoid foreclosure.

If I do a Short Sale, how much will I have to pay to sell my home?

Nothing. All commissions, title and escrow fees, commissions are paid by the lender as part of the Short Sale approval. The lender may also pay any outstanding property taxes.

How will a short sale affect my credit?

The main advantage of a short sale is not having a foreclosure on your credit report. By nearly any measure, a foreclosure is the most damaging event your credit status can encounter - worse than bankruptcy. In the course of getting your short sale approved you may miss your mortgage payments, and these will show on your credit. Short sales may still show up on a credit report as a ““debt settled for less than the amount owed”. Although this can result in a credit score reduction of 100 points or less, a foreclosure will usually reduce your score by more than 250 points. According to Fannie Mae, an individual that forecloses must wait 5 to 7 years, maintain at least a 680 FICO score in the last 2 years, and pay a minimum 10% down on a future home purchase. We have seen customers purchase a new home in as little as two years after their previous short sale.

What are the qualifications for a short sale?

The main qualification for a short sale is that you owe more on your home loan than what your home is worth. Secondly, you must be suffering some sort of financial hardship. Many lenders have dropped the required hardship explanation, however. Financial hardship can include many things, such as:
        Loss of Employment or Reduced Hours
       Major Illness or Medical Expenses
       Divorce
       Increased Bills
       Higher Living Expenses
       Investment Loss

How long will a short sale take?

It may take 2-4 months for the home to be sold. It can take longer depending on how backlogged the lender is. During the short sale process, you are allowed to live in the home. It is imperative that the process gets started as soon as possible.

Will I have to pay federal taxes on the money my lender loses in the short sale?

There are several different scenarios with regard to whether or not you will owe federal income taxes on the loss the lender takes in a short sale. When you do a short sale, your lender is agreeing to settle the debt on the property for less than the amount they are owed. The IRS therefore allows them to write off this loss, which is why your lender will send you a 1099-C after the short sale.

The IRS considers “debt relief” to be income for tax purposes. In other words, if your lender writes off $50,000 on your short sale, they will send you a 1099-C for that amount, and you would include that when you file your income taxes. The “C” stands for “Cancellation of Debt” and the law says cancelled debt is taxable as income.There are however a few exceptions that most people who do a short sale qualify for that exclude them from having to pay taxes on their short sale.

Thanks to the Mortgage Tax Debt Relief Act that George W. Bush signed into law in January of 2008, homeowners who do a short sale on their primary
residence, and have a purchase money loan (in other words, they have not pulled cash out of their home with a cash-out refinance) pay no taxes on the loss that their lender incurs in a short sale.

Homeowners who have pulled out cash from their home but have put that money back into their home to “substantially improve” their home, also are excluded
from taxes on the short sale.

All other short sale scenarios – if you pulled cash out on your primary residence but spent it something other than upgrading your home or if you are
doing a short sale on a second home or investment property – result in a taxable event unless you qualify for the “Insolvency” exclusion.

The IRS does not require you to pay taxes on the loss the lender takes in a short sale if, at the time of the short sale, you are insolvent. Insolvency
means your debts (including your mortgage) exceed the value of all your assets. In other words, if, at the time of the short sale, you have more debt than you
do money or assets, you are considered insolvent.

Many people who find themselves facing a short sale are in exactly this situation and are thus excluded from paying taxes on a short sale. We recommend
you check with your CPA or accountant or go to the IRS website and look up IRS Form 982, which is the IRS form for debt relief and short sales.
The IRS gives an explanation of “Insolvency” on this form.

Finally, the time period for The Mortgage Tax Debt Relief Act was originally only slated to go until the end of 2008, however it has now been extended to the
end of 2012.

We recommend you review your specific tax scenario with your CPA or accountant and have them answer any tax questions that you have. We are not tax advisors and do not dispense tax advice.

Will I have to pay CA state taxes on the money my lender loses in the short sale?

California has passed its own version of the federal Mortgage Tax Debt Relief Act. It is Senate Bill 401, which conforms to the federal law described in detail above, but applies to California state income taxes on a short sale.

Also, debt forgiveness on non-recourse loans is not taxable in California. In other words, if your lender forgives debt on a purchase money or non-recourse
loan, you are not subject to CA state income taxes.

With this said, we recommend you review your specific tax scenario with your CPA or accountant and have them answer any tax questions that you have. We are not tax advisors and do not dispense tax advice.

Can my lender go after me for the money it loses in the short sale?

No. The point of a short sale is to get out from under the debt of the mortgage. This is why your lender will send you a 1099-C after the short sale. The “C” in
“1099-C” stands for “Cancellation of Debt.” Your lender cannot write off their loss on their corporate taxes, send you a 1099-C so you have to pay taxes on the
loss, report the short sale as a “settled debt” on your credit and then turn around and go after you for the money.

If you hire and inexperienced short sale agent or negotiator who does not negotiate a full release from your lender, then, yes, you could be liable for the money the lender loses in a short sale or end up being forced to sign a promissory note to close the deal.

We do not ever recommend that our clients sign a promissory note or close escrow without a full written release from their lender(s).

I have two loans, can I still do a Short Sale?

Most people that we do short sales for have a first and a second loan, often with 2 different lenders. For the short sale to reach a successful close of escrow, both lenders have to approve the short sale and agree to settle the debt.

It is important to note that both lenders have a vested interest in doing this. The lender with the first loan does not want to foreclose, and therefore is willing to give a little money to the second in order to get them to agree to the short sale.

The second lender will get nothing if the first forecloses, so with the attitude that something is better than nothing, they will agree to take a fraction of what
they are owed in order to avoid getting absolutely nothing.

What is the difference between a recourse and a non recourse loan?

In general, a purchase money loan is considered to be a “non recourse” loan, while a “cash out” loan is considered to be a “recourse” loan.

The difference between these two loans is that in a “recourse loan” the lender technically has recourse to go after the borrower for the money they lose in a foreclosure. I say “technically” because, for this to happen, the lender has to file a judicial foreclosure, which is rarely done in California.

The overwhelming majority of foreclosures in California are “non-judicial” foreclosures, where the property is sold at a trustee sale.

How will I know that I am being released from the debt?

It will be stated clearly on the bank’s short sale approval. Your lender will state in plain English (though in different verbiage depending on the lender) that they are “releasing the lien”, “accepting a short payoff to satisfy the lien”, “reporting the sale as a settled debt to the reporting agencies”, “issuing a full satisfaction of the mortgage”, “not pursuing a deficiency judgment”, or some other variation that states they are settling the debt for less than what they were owed. Further, your bank will issue a 1099-C to you, the borrower, after the short sale, confirming that the debt has been written off and is settled. Your lender cannot write off the debt, issue you a 1099-C & then go after you for the deficiency.

What are the advantages of a short sale vs. letting my home go to foreclosure?

The primary advantage to doing a short sale vs. walking away and letting your home go to foreclosure is that in a short sale the debt is settled and you no longer owe the bank any money. If your home goes to foreclosure, you may still be liable for the deficiency in the event that the bank files a judicial foreclosure.

A secondary (but still very important) advantage is that in a short sale, your credit takes much less of a hit compared to a foreclosure. The impact on your credit will vary depending on how established your credit is at the time of the short sale or foreclosure.

Finally, Fannie Mae & Freddie Mac revised their guidelines in August of 2008 with regard to how they view borrowers who have filed bankruptcy, gone through foreclosure or done a short sale. Through these new guidelines, they are in effect severely penalizing those who go the route of foreclosure or bankruptcy, and rewarding or encouraging those who do short sales, which they view as the borrower doing the responsible thing in light of the circumstances.

Per recent Fannie Mae / Freddie Mac guidelines, borrowers who file bankruptcy or go through foreclosure have to wait up to 7 years to buy another home.

By contrast, the new guidelines stipulate only a 24 month waiting period after a short sale, so borrowers who do a short sale can buy again in just 2 years.

Are there any advantages to letting my home go to foreclosure vs. doing a short sale?

I have yet to hear a coherent argument for letting your home go to foreclosure vs. doing a successful short sale. Depending on whether you have a recourse or non-recourse loan, when you let your home go to foreclosure you either run the risk of being liable for the deficiency amount or liable for the income taxes on that loss.

Secondly, your credit will drop up to 400 points and you will not be able to buy a home or get any decent credit for up to 7 years.

Compare this with a short sale, in which the lender agrees to SETTLE the debt for less than the amount owed. If you have recourse loan, you may be liable for income taxes on the lender’s loss (just as in a foreclosure) but you will not be liable for the deficiency (and if you qualify for the “Insolvency” exclusion, you will
avoid the income taxes as well).

Further, the loss that the lender takes in a short sale will be MUCH LESS than the loss the lender takes at the end of the foreclosure process. The foreclosure process takes months & months, at the end of which the lender has to process the property through its overwhelmed system (another 3 -5 months) and then put the property back on the market, all while the market continues to drop.

Finally, the impact on your credit from a short sale will be significantly less than with a foreclosure and you will be able to buy again within 2 years, compared to up to a 7 year waiting period to buy a home after a foreclosure.

Do I need to continue to make my HOA payments when I do a short sale?

Yes, We always recommend that you continue paying your HOA dues, or if you are already behind, try to start paying something towards them. Your Homeowners Association can have more impact on your short sale than you think. If you cannot afford to pay this, we will do our best to get the buyer to
pay this through escrow.

Do I need to hire an attorney to do a short sale?

It is our belief that you will be best represented in a short sale by a competent, experienced real estate agent who works every day in the real estate business, will market your property aggressively in order to attract buyers, and who is experienced at doing short sales and negotiating with lenders.

If you have questions about the tax implications of a short sale, we recommend you seek the advice of a qualified CPA or tax accountant.

If you want to explore filing bankruptcy, we recommend you seek the advice of a competent bankruptcy attorney.

With this said, a word of caution. Many attorneys seem to be preying on the fear and desperation of people facing foreclosure. Their websites use scare
tactics to make people think that they would be crazy to do a short sale without first hiring an attorney, that attorneys are the only ones qualified to interpret a short sale approval, and that hiring an attorney is a normal and accepted part of doing a short sale, like hiring an attorney for divorce proceedings.

The bottom line is that this is just not the case. The overwhelming majority of short sales are conducted by real estate brokers who are experienced at
negotiating with the lenders and charge NO UPFRONT FEES for their services.

Finally, many of these attorneys do not even negotiate the short sales themselves, and instead subcontract out all of the short sale negotiations. In our opinion, these short sale negotiation companies (known in the industry as “short sale mills”) are absolutely the wrong entities to entrust with the negotiation of your short sale.

Should I file bankruptcy? Will it allow me to keep my home? I’ve heard the lender cannot foreclose if I file bankruptcy.

There are 2 types of bankruptcy commonly used by individuals – Chapter 7 (“Fresh Start”) and Chapter 13 (“Wage Earner”). Chapter 7 can enable individual filers to wipe away debts such as credit card and medical bills so they can continue to make their mortgage payments. Chapter 13 involves setting up a 3-5 year repayment plan to repay your debts. Chapter 13 requires that you are earning a steady income, as you will be repaying all of your debt. Both have a very negative impact on your credit and remain on your credit report for 10 years.

Because of the new 2005 bankruptcy law, which raised the bar for people to qualify for Chapter 7 “fresh start” bankruptcy proceedings, fewer and fewer people pass the “means” test to qualify for Chapter 7 and for this reason can only qualify for Chapter 13 bankruptcy (a 3-5 year repayment plan).

While both Chapter 7 and Chapter 13 can temporarily delay foreclosure proceedings, neither will allow you to keep your home unless you can bring your mortgage current.

If you would like more information on whether a bankruptcy is right for you, we recommend you consult a competent bankruptcy attorney, as we are not attorneys and do not dispense legal advice.

Can any agent do a short sale?

Absolutely not. Many agents have no interest in doing short sales because they require a tremendous amount of time and expertise. Make sure you have an experienced short sale agent on your side.

Disclaimer: The information provided on website is not engaged in the practice of law nor gives legal advice. It is strongly recommended that you seek appropriate professional counsel regarding your rights as a homeowner.

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