Many myths continue to circulate about the real estate loan modification process. As we enter 2011 and the economy and the housing market continue to remain uncertain, many California homeowners may find themselves facing unaffordable mortgages and mortgage balances that may be more than what the property is currently worth (typically referred to as an “underwater†or “upside down†mortgage). And as the market for mortgage assistance grows, the number of misinformed homeowners has increased as well.
Many people who seek relief from underwater loans and difficult mortgages enter the loan modification process with serious misconceptions and inaccurate information, only to discover that they have made all the wrong decisions. More importantly, a homeowner may lose precious time that could have been spent on more viable, realistic alternatives to their mortgage difficulties.
Is a loan modification really the most effective long-term solution to a difficult mortgage problem? How do we separate fact from fiction? What is a loan modification, anyway?
There are many names for a loan modification and they include terms such as mortgage modification, restructuring, or workout plan and so on. But typically, a loan modification refers to a situation where a homeowner — who is having difficulty making their mortgage payments due to great financial hardship — is able to change the terms of their mortgage loan with their lender. This change could be a temporary or permanent change to the mortgage rate, the monthly mortgage payment or even the length of the loan. While this may sound simple enough, the sad reality is that many homeowners who attempt loan modifications will be not successful. In fact, State Attorney Generals in several Western States have recently accused a major bank of acting in bad faith and went on to file lawsuits against the bank for promising homeowners loan modifications that were never delivered.
In reality, there is no guarantee whatsoever that a lender will, or is even obligated to, offer even a qualified homeowner a loan modification. And even if the lender does agree to modify a loan, it is extremely unlikely that the lender will ever forgive any amount of the original loan principal. The crushing long-term emotional and financial burden of the outstanding principal will more than likely remain the homeowner’s obligation for decades to come. While a loan modification might function as a temporary band-aid for a homeowner experiencing mortgage difficulties, without significant changes to the loan principal or the homeowner’s life-situation, the possibility of foreclosure continues to remain a dark cloud over the homeowner’s future. In truth, even President Barack Obama stated very clearly at the outset of the unraveling housing crisis that the loan modification process cannot and “…will not save every home.”
However, viable and realistic options do remain for the homeowner who – through loss of a job, hospitalization, death of a spouse or some other extreme life tragedy – can no longer pay their mortgage. One of these options is called a “short sale†. A short sale in real estate means that the lender has agreed to accept less than the total amount of what is due, in order to fully satisfy the debt. Often a lender will agree to a short sale as they may believe that this could result in a smaller financial loss to them than a foreclosure. For the homeowner, a short sale can minimize the extensive damage and negative impact to credit that is part of the foreclosure process.
Additionally, a short sale can relieve the homeowner of unpaid mortgage payments, unpaid property taxes, negative equity as well as the heavy financial and emotional burden these overwhelming expenses can place on the homeowner and his or her family.
The often-heard common sense advice to “never leave anything to the last minute†applies here because when it comes to a short sale, time is of the essence. All lenders have differing requirements and requests for documentation. The lender may ask the homeowner for various types of highly specific documentation, which a qualified real estate agent can help prepare. The lender may also ask a homeowner considering a short sale for proof of income and assets, copies of bank statements as well as a hardship letter. The hardship letter describes how a homeowner got into their present situation and what they have done to get out of it, and why the situation will not change. These letters may not be easy to write, because nobody wants to sit down and recount to themselves, much less anyone else, how dramatically their life and finances have changed since they bought their home and that it will not improve – but it is important to be truthful.
Once the lender has fully reviewed the homeowner’s documentation, if all goes well, the short sale will be approved. Every short sale situation is different and it is important to note that not all lenders may agree to a short sale, not all homeowners may qualify for a short sale, and that there may also be legal as well as tax consequences for a short sale transaction. Therefore, it is always best for a homeowner who is considering a short sale to consult up front with the appropriate qualified professional who can help assess their situation and provide support, guidance and assistance.
A short sale is a highly complex transaction – in theory any licensed real estate agent can assist a homeowner with a short sale. However, when the homeowner works with an agent who is highly experienced in short sales and understands the entire process, the negotiations with the lender will proceed more smoothly and the chances of success will be significantly increased.
There are viable and realistic options for homeowners who can no longer keep up with their mortgage payments and a short sale is one of these options. Unlike a loan modification, a short sale can be a more realistic long-term solution to a difficult mortgage problem. And unlike a foreclosure, a short sale does not result in the across-the-board destruction of a homeowner’s credit and personal dignity.
Michael Bates is a Los Angeles area Realtor who is highly experienced in all aspects of the short sale process. Michael can be reached at michael@batesestates.com or 310-245-4166.
