Home prices are trending up but here in my home state of MN… I still hear the question “I’m underwater on my home and want to know what can we do?”. We (at iLoan) have addressed this with many home-owners and are trying to guide real estate agents when they’re asked as well in the last couple years. This BLOG is meant not for people who may be in the 11th hour of a Short Sale or Foreclosure but rather someone who is current on their mortgage and still owes more than what it’s worth.
Following the market updates from the last couple years the state of MN’s Twin Cities’ market area which includes Minneapolis and St Paul the “percent of homes underwater” has been going down. Reports I reviewed show that the peak of about 35% of all homes in MN were believed to be underwater back in March of 2010. The more recent Corelogic reports from Q2 of 2012 had 17.1% and Q3 of 2012 shows 16.9%.
What home-owners most hear about in the media or friends is that they may only have 2-3 options and they don’t seem too appealing so they don’t look much further. What someone should do is seek the advice of qualified real estate agents, real estate attorneys and a skilled Loan Officer. But… before you pick up the phone there’s some homework to do! If not… the professionals you call will just be spinning their wheels if they don’t have the details.
1. Know your “mortgage address”. This may be different than what your mailman delivers your bills to. Go to www.usps.gov and confirm here. This is the address that Fannie Mae and Freddie Mac will use.
2. Collect your financial documents. Anytime you’re working with a loan officer on a loan, a Realtor on a short-sale or an attorney on these issues… they’ll need everything (scanned to PDF for everyone’s convenience)
- The last 2 yrs of federal tax returns including all w2s or 1099’s
- Business returns if you were self employed
- Recent paystubs
- Recent bank statements
- Recent retirement account statements
- Copies of all mortgage statements
3. Collect your legal documents. At the least find a copy of your “mortgage note” from your closing documents but if you have the entire closing package… that may help. The title company that closed the loan could possibly scan and email you the docs to save you the time of getting that in that convenient PDF format J
4. This isn’t necessary... but it’s wise. Get a copy of your credit report at http://www.annualcreditreport.com/(this site is truly free and not a scam). Knowing the content of your credit will help you write letters of explanation if you’re doing a mortgage loan or a hardship letter if you’re doing a short sale.
That list above will really help if you want the quickest answers regarding which option(s) you may qualify for. Here’s the list I’ll run through with you:
1. Fannie Mae HARP (DU Refi Plus). If your loan is owned by Fannie Mae, you may be entitled to refinance over and above what your home’s value is at. You can get a loose idea of what your home is worth at www.zillow.com . To see if your home is owned by Fannie Mae, go to http://loanlookup.fanniemae.com/loanlookup/ and enter your address as it appeared at http://www.usps.gov/. If it is owned by Fannie Mae and you owe less than 125% of the value of your home, you may be eligible for this loan. The rates are slightly higher than normal advertised rates because of pricing add ons but they are close enough to market rates to be a heck of a deal.
2. Freddie Mac HARP (LP Open Access) If your loan is owned by Fannie Mae, you may be entitled to refinance up to 125% of your home’s value. You can get a loose idea of what your home is worth at http://www.zillow.com. To see if your home is owned by Freddie Mac, go to https://ww3.freddiemac.com/corporate/ and enter your address as it appeared at http://www.usps.gov/. If it is owned by Freddie Mac and you owe less than 125% of the value of your home, you may be eligible for this loan. The rates are slightly higher than normal advertised rates because of pricing add ons but they are close enough to market rates. This program will not let you finance more than 5 thousand dollars in closing costs and prepaids so if your settlement charges exceed 5 thousand, be prepared to bring cash to closing.
3. FHA Streamline Refi – If your loan is currently owned by FHA they allow what is called a “streamline refinance” to be done with a lender who is approved by HUD to offer these programs. There is no appraisal needed and home-owners can have the OPTION of having closing costs rolled into the loan or come to the closing table with all costs.
4. FHA 115% Write Down Refi - This one doesn’t have a name yet so I just made that up. It’s a complicated program and I’m not sure how successful it will be. Essentially, if you’re refinancing a non-FHA loan, you’d take a loan out at 97.75% of your home’s value. A balance may be subordinated to the first mortgage thus becoming a 2nd mortgage but that loan may not exceed 115% of the homes value. For any of this to happen, the existing lender/s must write down their loan balances by at least 10%. Here is theannouncement for this program. You must be current on your mortgage to qualify for this loan. A history of late payments will likely disqualify you for this loan.
5. FHA Short Refi - This one is a little simpler. Essentially, you get preapproved for a 97.75% loan to valueFHA refinance. This loan will support a certain amount to be paid to your existing lender. Whatever the loan can’t support, assuming you can’t come up with the difference in cash, will have to be written off by your existing lender. You’d be surprised how many lenders are willing to do this (I know I have been). This wasofficially permitted by HUD in December of 2009. You must be current on your mortgage to qualify for this loan. A history of late payments will likely disqualify you for this loan.
6. Modification - You do not necessarily have to be in default to get a loan modification. If you’ve had any kind of hardship (i.e. involuntary reductions of income or unavoidable increase in expenses that indicates that you might go into default and you feel that you owe so much on your home and at such poor terms that you’re losing your incentive to repay, that might be enough to qualify. Many people have their own opinions on this and I don’t assume that mine is the best but I don’t recommend contacting your lender directly as a starting point for a modification and I don’t recommend calling a pay for hire service either. I recommend calling 1-888-995-HOPE (4673) to speak with a HUD approved counselor for free. They will conduct an interview and serve as an initial intermediary between you and your lender.
7. Deed in Lieu - This is where the owner of a property deeds the property back to the lender to avoid foreclosure. Obviously, this only makes sense if you want to get out of the situation quickly and don’t want the house anymore. I highly recommend the assistance of an attorney in this to ensure that the act of deeding in lieu serves as payment in full of your mortgage to prevent both damage to your credit and the potential of deficiency judgments.
8. Short Sale - A short sale is where a homeowner and lender cooperate to sell a home in a situation where more is owed on the home that the house is worth. The buyer and their Realtor prepare the home for sale and market it and in exchange, the lender writes down the balance of their note to facilitate the sale. It is less costly that foreclosure so lenders are typically willing to do this. Often times, with the help of a good Realtor, damage to your credit can be ameliorated. When choosing your agent, make sure they have a lot of past experience with short sales, are aware of what is changing in short sales and, preferably, they have done short sales that involve your current lender.
9. Foreclosure - Now I hesitate to even mention this; but a fact is a fact. Foreclosure is an option. If you’re upside down and you can’t make your payments, sometimes you just have to let go. Too many people think the sheriff’s sale is the end. It’s just a step in the process. Although it varies by state, foreclosure is usually a 9 month process. So, 9 months of living in the home and then you move out. It’s an ugly option. . . but it’s an option.
When we are under stress, we often reach for the first or easiest option that might get us away from the cause of that stress. In the case of the underwater homeowner, that can be a huge mistake. Few know how many options they really have and, if these options are weighed carefully, they can learn that with some effort on their part and the help of qualified professionals, they can get away from their problem with a good solution in hand.
Please remember that all of these loan types (listed above) are very difficult and consequently, you’ll need an excellent loan officer. Managing your legal risk in a deed in lieu situation or conducting a Chapter 11 requires a seasoned and sophisticated attorney. Proper execution of a short sale is both a science and an art so... if that’s the route you take don’t make a quick decision on a Realtor. Just because they advertise as a short sale expert doesn’t make it so. Choose your professionals wisely, be deliberate in choosing the solution that you want and be organized and you’ll find that you’re closer to being stress free again than you think.
In fact… the new FHA Back to Work program will allow someone to purchase a home in as little as 12 months after the “economic event” (with qualifications).
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