Pin Money Club

Times are more than tough - they’re downright scary - but this isn’t the time to hide your head in the sand and wait for the worst to happen, especially if you think you’re at risk of losing your home. There are some things you can do - the banks don’t want too many people to know about those things - but I’m blowing the whistle.

Depending on the state of real estate in your neck of the woods and your bank’s prior lending practices - they may be holding on to a large and messy inventory of foreclosures. Foreclosed properties can sell for as little as 40 cents on the dollar and so many banks are aggressively “working out” mortgages with their customers because it’s in their financial interest as well.  Here are two of the ways they’re doing that…

 Loan modification

Loan modification is not the same as refinancing. If you can’t qualify to refinance - yes, it’s ironic that you can’t refinance right when you need it most - what kind of craziness is that? Well, it’s the bank’s way of stonewalling you in the hopes that you’ll keep paying them lots of money for as long as possible. 

A loan modification is different because you are appealing to the bank’s ”workout” department on the basis of financial hardship and no underwriting is required. With a loan modification, you typically submit a written explanation of how the financial hardship arose, provide a statement of income and expenses (you have to show that you can’t afford the payments as they are) and then tell the bank specifically what you’re looking for - it can be framed as a reduction in the interest rate or as a specific monthly payment you need, a reduction in the principal balance or an extension of the loan term. 

Generally a modification won’t negatively impact your credit since it’s just a change in the terms of the loan, but if you’ve had late payments prior to the modification being approved, that’s obviously going to ding your score a bit. Lesson here, do it sooner than later if you think you’re at risk of foreclosure.

In a friend’s case - she was able to reduce her interest rate by 2.75% and that translated into an almost $800 reduction in her monthly mortgage payment - the only catch is that her 10-year fixed loan converted to a 5/1 ARM. It was a humbling experience for my friend and it took a lot of courage to disclose the gory details of her financial life to a perfect stranger, but she kept herself from being put out on the street. 

Short Sale

Right now, roughly 40% of home sales nationwide are in the form of ”short sales.” A short sale involves getting your bank to allow you to sell your home for less than the amount you owe - usually within a certain range -as an example, the bank may say it can be sold for anywhere between 80 and 85% of your balance.

Watch out for…
Short sales can still result in what’s called a “deficiency”balance and you could be held liable for that deficiency. Rules relating to deficiency pursuits vary from state to state. If you are considering a short sale, make sure to work with a knowledgeable short-sale realtor  - the good ones will likely have already worked with your bank on another deal and can help you navigate that bank’s application process which includes a hardship package similar to the one required for a loan modification. It’s also a good idea to consult with a real estate attorney. 

Also, if a balance is forgiven, it is possible that it can be taxed as ordinary income. However, the Mortgage Forgiveness Debt Relief Act and Debt Cancellation Act, a temporary measure passed in 2007,  provides for some exceptions. Click here to go to the IRS’ web site page detailing those exceptions.

Although a short sale does adversely affect your credit report, the impact is far less than the impact of a foreclosure. For purposes of your credit report, a short sale appears as a “settlement” and will stay on your credit report for seven years. Depending on your overall creditworthiness, it is possible to get another mortgage within 1-3 years after a short sale.

So take heart and take action - in the immortal words of Joseph Kennedy and Billy Ocean: “When the going gets tough, the tough get going.” Click here to be instantly transported to the halcyon days of the mid-1980’s and sing along.