Short sales and loan modifications are buzzwords these days.  As much as people talk about them, do they really understand them?  In this post I am going to help you decide which is best for you.

Here are the 7 secrets that your bank does not want me to tell you:

1.  Principal Reduction:  Yes, it is possible to reduce the principal balance that you owe on your mortgage.  There is a lot of controversy out there surrounding this topic, but the fact is, if you can prove to the bank why lowering the amount you owe to them will be in their best interest, they may have no other choice.  Hint:  The average cost of a foreclosure is around $50,000.

2.  There are no rules:  Contrary to what your bank may be telling you about not getting a professional to help you, not being able to reduce your principal, not being able to extend your term, or even as far-fetched as “we don’t do loan modifications”.  They will say whatever they want to say to get you off their back.  It really is a testing mechanism.  They are trying to weed out the curious from the serious and if you get frustrated and don’t attempt a mod because of their claim, that is one less case they have to work on.  You can negotiate whatever you want.  The key is to have persistence and make it a win-win.

3.  Their first offer is bogus:  They will find a solution that feels good to you because it is much better than your current situation but they will leave room on the table.  After all, they are a business and they are not trying to throw money away.  They will offer you the minimum which would essentially mean you are still scraping by.  If you can put together a good case, you can negotiate their first offer down and get a much better deal.

4.  Right to Requests:  If you submit a written request, they have to reply to it within 20 days.

5.  Hardship Letter:  This is a an over-rated piece of the puzzle.  The banks want you to believe it is the most crucial component to your application.  I’ve heard that most banks don’t even look at it.  They simply tell you this because it will distract you from focusing on what is really important: the numbers.

6.  Most late fees are bogus:  Have you wondered why your mounting late payments are growing exponentially and not just by the sum of the late payments?  They charge late fees and other erroneous fees to help their case in front of the judge.  Plus, they know that some owners will make good on their back payments and have to pay that amount to come current.  Most of these fees are bogus and not part of the original agreement.  If you ask them to send you an itemization of these fees while you are negotiating, you will soften them up quite a bit.

7.  RESPA and TILA Violations:  This is the Big Kahuna!  When you bought the property they made you sign the Real Estate Settlements Procedures Act and the Truth In Lending Act documents which disclosed information about your loan.  Most lenders put stuff in there that is so far weighted in their favor that it can be construed as illegal and fraud.  If you learn how to scour your mortgage documents, you can pull these things out and throw them in their face.  They will be extremely soft at that point.

It is very important that you learn the whole process and understand how to effectively negotiate a loan modification before you make an application.  One wrong move could mean devastation.  If you are looking for a good way to learn how to get the lowest payments, best terms, and have the best chance at success, click here to see an excellent system that will give you the right information.  Otherwise, feel free to leave a comment below.

Nick

Here are 10 items your bank wants to see before they will lower your payment:

1.  Debt to income ratio:  The bank will want to see that you can afford the new payment.  At the same time, they want to make sure that you cannot easily afford it.  If you are making a lot of money, they will think that you can afford the current payment and will not see enough reason to modify your loan.  If you don’t make enough money, they will assume that you will default on your new modified payment plan.  The bank is looking for something around a 35% debt to income ratio.  This means that your total monthly expenses will be around 35% of your gross monthly income.  If it is much lower, you make too much money.  If it is much higher, you don’t make enough.  There are ways to play with the numbers that are legitimate so that you can increase your income or decrease your expenses or both.

2.  Hardship:  Do you really need help?  They bank will put a fair amount of emphasis on this point.  If you are asking for help because you are looking for ways to decrease your expenses, they will sniff that out.  If you really need help and desperately need to save your property, there is a good chance they will work with you.  If you lost a job, lost a loved one, had a sickness in the family, had your rate adjust, work less, spouse makes less money, or any major and legitimate reason that caused you to fall behind and ultimately requires a lower payment to get back on track, the bank will try to work with you.  The other option is foreclosure and that is the worst option for them.

3.  Financial Improvement:  Usually banks ask for you to disclose what your projections are for income.  If you anticipate a better job in the next couple months, they will use that as part of their formula.  If you don’t, it does not apply.  The point is, if your income is going way up, they will not think you need a loan mod.

4.  Investment Property:  Is this an investment piece of Real Estate?  The banks are willing to modify loans on investment properties, but they are more strict.  Investors tend to be a little more numbers savvy and they do not want to be taken advantage of.

5.  Bankruptcy:  If you are filing a Chapter 7 bankruptcy, they will want to know if you are naming the property in the BK.  If you are, they see more risk because you can default on the new agreement and they cannot come after you at all.  If you are not, they are more likely to approve your mod because they know they can come after you for a deficiency judgment after they foreclose.  Usually they will not do this anyways, but they want to know your intentions.

6.  Credit:  Although they do not care what your credit score is, they do want to look at your credit report.  They will compare your application with your credit report to verify all of your claims for debt and payments.

7.  Age of late payments:  Are you current?  Are you just starting to fall behind?  Are you many months behind?  The sooner in the process you start this, the more they will want to work with you.  Usually they will want to see that you are very serious and will not actually approve a modification until you are a couple months late, but if you start working with them before that, they will see that you are responsible.  The opposite is true, too:  If you are many, many months behind, they will think that you are using this as a last resort and may not be as interested in keeping your property as someone who got on the phone right away.

8.  Age of current loan:  If you just got your mortgage, it will be tougher than if you have had it for years.  The reason for this is because they do everything they can to prevent fraud.  There are some people out there who are working the system and they will get a loan and then shortly after get it modified.  If you did get it recently and are not playing the system and do have a real hardship, I wouldn’t worry about it.  If you have had your loan over a year, this probably does not apply either.

9.  Current terms:  If you have one of those funny adjustable rate mortgages, negative amortizing loans, pick a pay mortgages, or anything that is adjustable, there is a real good chance they want to modify your loan.  They know where the economy is and they know that rates are going up at some point in the near future.  They would rather get your locked in now while the rates are so low, so that you succeed and do not come back to them again in the future.

10.  Insolvency:  How is your net worth doing?  If you have a ton of assets and few liabilities it will be tough to qualify.  If you add up all of your assets and subtract all of your liabilities from that and the number is negative, your chances are much better.  It also depends on how liquid your assets are.  If you have a property that has equity, they will not be so upset, but if you have an airplane that is paid in full, they will assume that you can sell it to fix the mortgage problem.  If you have all of your assets in retirement accounts like IRAs, 401Ks, Keoghs, etc., don’t worry, they put no weight on them because they are exempt from your foreclosure deficiency anyway.

The main point here is not that you have to meet ALL of these criterion; the point is that the closer you meet with these loan modification qualifications, the easier it will be for you to get it done.  You don’t have to know everything before you get started, just make sure you get started.  This should be enough information for you to have a good feel for what the bank is looking for.  I would recommend reading a good book from the library, doing some research on the internet, or getting some help from a friend that has been through this.  Click here for a good loan modification system online for under $100 that will teach you everything you need to know and hold your hand through the process.

If you have any more questions or would like to make a comment, feel free to post below.

If there is 1 major lesson to be learned from this foreclosure crisis, I believe it is the importance of simplicity and getting back to the fundamentals of life.  The credit card boom has enticed most of us to spend, spend, spend.  That has led to an entitlement mentality where it is easy to believe that we deserve to have it all.  When reality strikes and the economy comes tumbling down as Einstein predicated in the theory of relativity, we are forced to take  action on some of the important and basic truths of life.  In this case, an owner who is struggling to make a decision between foreclosure, loan modification, short sale, or any other foreclosure variation, these basic questions have to be answered.

This site is designed to answer those questions.  Hopefully you are able to find some answers for some of the tough questions you are forced to answer.

Here are 7 loan modification benefits that may help you decide if modifying your loan is best:

1.  Payment:  This is probably the most obvious.  There are many owners out there who have lost their job, make less money, have sickness in the family, have fallen behind in bills, received a notice that their adjustable rate mortgage is going to increase their payment or for whatever reason cannot afford their payment.  If you are in this situation and it is legitimate, your lender will most likely consider modifying your loan so that you can lower your payment and keep your property.  If they foreclose, they take ownership of your property, and they are not in the business of collecting Real Estate, they would rather have a good loan at less profit so that they can continue to lend money out to new home buyers rather than move funds over to manage properties.

2.  Principal Reduction:  This one is more rare, but is possible.  As the market continues to decrease, banks are more likely to consider agreeing to decrease the amount of the note.  So, if you owed $200,000, they may be willing to drop the principal balance down to $170,000 or some other number to adjust the balance closer to the market value.  This saves them money compared to a short sale and definitely compared to a foreclosure.  Your situation has to be just right, but if you learn how to do it, or have the right help, you may be able to reduce your principal.

3.  Better than re-finance:  If your credit was good, your income was good, the property has equity, and you found a bank that is refinancing loans, you COULD get a refi.  Why though?  A loan modification costs less since there are no points.  Your lender has a lot more incentive to negotiate great terms with you than a prospective lender would.  And most importantly, you will save more money.  Some loan mods go down to 0%.  Typically, they are between 2 and 4% in this market, but where are banks rates right now?  4,5,6%?  I mean, in the grand scheme of things, that is excellent, but if you could chop another $100 or $200 off your payment with no additional cost, why not.  Yes, you do have to pay a loan mod specialist there fee if you don’t have the time or the patience.  But realistically, you can do this yourself if you get educated.  Click here to see a website of a guy that teaches do it yourself loan modification.

4.  Better on your credit:  A loan mod is not marked on your credit report as a loan mod.  You will not suffer credit damage from a loan modification itself.  If you let it go to foreclosure, you will get a couple hundred points in damage, if you do a short sale it will be more like a hundred.  If you do a loan mod, the only damage you suffer is your late mortgage payments.  More importantly, a  foreclosure on your record will mean that whenever you fill out an application for a loan or for a job in the future and the application asks “Have You Ever Filed for Bankruptcy or Been Foreclosed Upon?”, you will have to answer yes.  A loan mod or a short sale will eliminate that.

5.  Keep your property:  If you could just move on from this trauma, life would be easier, right?  One of the great benefits of modifying your loan is that you get to stay put.  Think about all of the time you will save by not moving again, not having to say goodbye to neighbors, not having to send a mailer out to all of your contacts to let them know you moves, not having to go to the post office and having you mail forwarded and changing the address for all your creditors, and on and on.  If you simplify, it will be easier to have peace.  If you have peace, you can work towards a better job, spending more time with the family, etc.

6.  Make your family happy:  Foreclosure is a scary thing.  Many people don’t understand it very well and it is easy to feel like a failure.  By modifying your loan, you will be able to get back to the basics and take care of your family and have more fun and peace in life.

7.  Help the economy:  Did you know that banks are being forced to keep half of their foreclosures OFF of the market.  This means for all of the damage that the REO and Short Sale properties have done to values, it would be a heck of a lot worse, if the government did not impose this rule.  By modifying your loan, you are taking that burden off of the bank.  You are also keeping your property which means that the bank will not have to put it on the market (or leave it to rot off the market) which adds to the already huge inventory which is dampening values.  By keeping your property, you are helping the economy in a very real and tangible way.

This process is not easy but it is simple.  The only thing that separates you from a successful loan modification with considerably lower payments is a little education.  To get that education, click here to see the guy I recommend who will hold your hand for dirt cheap.  Otherwise, contact me, post a comment, ask a question, or contact a friend who has experience.  There is hope!!!

In general a short sale will damage your credit.  The better question is though, which is better for your credit, a short sale or a foreclosure?  A short sale is said to bring your credit score down around 100 points.  A foreclosure or deed in lieu of foreclosure is said to drop your score around 250 points.  There are many factors that go into the actual amount your credit score will drop but that gives you an idea.  There are several other reasons besides the actual FICO score that you may want to consider avoiding a foreclosure.

Here are 8 damaging effects of foreclosure on your credit:

1.  Deficiency Judgment:  You have probably heard that a judgment could be entered against you which would hold you liable for paying back for the bank’s loss.  In a foreclosure, you have no idea if you are going to get a deficiency judgment.  In a short sale, you have some control because your agent can put a clause in the contract that says the bank is releasing you from liability if they accept the offer from the buyer.

2.  Credit History:  A foreclosure will remain on your credit report for 10 years or more.  A short sale is reported as “paid as agreed” or something similar that signifies you are no longer liable for the debt.

3.  The F word:  As soon as you have been foreclosed on, you have to disclose that for the rest of your life.  Have you ever noticed that question on your job application, auto loan application, or any application that is affected by your credit:  Have you ever been foreclosed upon?  Well, if the answer is yes, you may have just been disqualified.  If you have sold your property short, you can answer that question NO.

4.  Employment:  As stated above, if you are applying for a job, your prospective employer will look at your credit.  Not only will a foreclosure look bad on your credit, but he/she might see you as irresponsible if they know that you could have chose to sell it short.  Also, if you complete a short sale, your credit score will be higher which looks better to an employer.

5.  Residence:  Under Fannie Mae guidelines, a person with a foreclosure on their credit report will not qualify for a mortgage until 5 years after the sale date.  Even if you plan never to buy again, things change through time and you may be regretting that in the future when your family is stuck in a small apartment.

6.  Security Clearances:  Did you know that your position could be/should be terminated if you work for the government because of a foreclosure?

7.  Life back on track:  In a short sale, you can regain your composure within 2 years.  In a foreclosure it will most likely take 5 years or more to be back to where you were before you started to miss payments.

8.  Economy:  Did you know that if you sell short the bank will never take ownership?  In a foreclosure, the bank takes the property back via foreclosure, assigns an asset manager, does repairs, hires a Realtor, and assumes alot of costs in that process.  If they sell it short, they will get it off their books and save money.  This means that they will be able to make a loan to another buyer in the near future with that money.  The sooner we all get our financial lives in order, the sooner the greater economy will improve.

I hope this helped.  If you have any questions, suggestions, or comments please leave them below.  Also, if you have a twitter following, please retweet this by pressing the “tweet” button above this article if you think it will benefit the people on your list.

One other thing:  Short sale rules, laws, and opinions are changing every day in this quickly changing industry.  Do not take this is as legal or tax advice because I am not an attorney or accountant.  These are generalizations I make as I learn more from being full-time in Real Estate.  Please do your own research and do not take these tips as the final answer to all of your questions.

Nick