I have written a lot about foreclosures, and their effect on people, neighborhoods, and the economy. This time around, I thought it would be helpful to real estate agents and homeowner alike to spread some advice on how to handle a loan in default.
Realtors can be a great advantage on working with people in default. By providing a market analysis to potential clients in their farm areas, they can giove homeowner a sense of the financial need they are facing.
Homeowners can also prepare to work with their lenders, using the market analysis as a tool. Before they cal the lender with the news on market values, though, they need to get their documents in order. Here are things they need to have prepared beforehand:
- Hardship letter, which explains why their loan is behind on payments;
- W-2 forms for most current tax year
- Pay stubs for last 2 months
- Bank statements for past two months
- A Financial statement ( balance sheet) with all income, expenses, assets and liabilities.
I would also suggest and maintenance improvements necessary to repair the property (paint, roofing, carpet, etc.) Don't go crazy here, because if it is possible that the lender can or will modify the terms of the loan, they will most likely have a Realtor they work with come out for a set of photos, and broker price opinion. From this assessment of the property, the bank will determine what it is willing to do.
In the past, banks might have waited 6-9 months before they started default collection action. Now, they are starting to work within 45-60 days of default, because of the high rate of foreclosures. Some lenders work this directly and others hire third party companies to try to get the arrears collected. They also might hire outside firms for their loss mitigation efforts.
Here is a new glossary for the process:
- Arrears - payments that have not been made on the mortgage
- Default - The status of a loan when payments aren't made. Also can be a substitute term for Arrears.
- Loss Mitigation - A process initiated by a bank or third part hired by a bank to avoid a loss of the mortgage via counseling the borrower on options.
- Loss Mitigator - a person trained (sometimes) to work with homeowners in default on their payments.
- REO - Real Estate Owned. When the house is surrendered to the lender it becomes an REO property, to "bank-owned."
- Short Sale - A sale allowed by the lender for less than the amount owed, to avoid foreclosure.
I know there are a lot of other terms that can possibly apply to this situation, but these are some that are not talked about as much.
I will post a sample financial statement on www.geocities.com/coloradohomesandland for you to use, if you need it.
If you have a mortgage in default, the last thing to do is not communicate with the lender.