Short Sale or Loan Modification?

Comments (11)
June 24, 2008

While searching for short sale news the other day I ran across a good blog post by Jim Klinge. He was replying in detail to one of his readers who was struggling trying arrange a short sale or a loan modification. Jim brought up a number of valid points, one of the best being the fact that many Buyer’s Agents are shying away from short sale listings because of the baggage that comes along with many of them. Click here to read Jim’s insights on this.

The questions posed were valid and are probably the concern of countless people currently facing foreclosure or will be soon if something doesn’t change to make their home more affordable fast. It really seems that virtually everyone is checking sites like lovemoney.com and others to get smart with their money. Unfortunately, some people are in so deep that not even prudent financial measures can save the situation. This is when loan modifications can be useful.

In this video I’ve covered three main points:

1) Loan Modifications - why your bank and yourself may not be seeing eye to eye on this one.

2) The Main Reason a Loan Modification Will Be Denied

3) When a Short Sale is of more benefit than a loan mod.

Please leave a comment below if you want to ping off of what I’ve gone over in this video or if you have some experience/insight in getting loan mods approved that may be of benefit to others looking to get one for their own mortgage.

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11 Comments, Comment or Ping

  1. Fantastic content Brian. You have done your homework and this episode will help a lot of folks make the right decision.

  2. Jon Earl

    Hi, I live in Taylor Michigan. We are in the process of buying a new house, we NEED to move. We have a growing family and our starter house isn’t cutting it anymore. We were looking at a short sale but don’t want to totally destroy our credit. How bad does a short effect credit score? I am also interested in possibly keeping it as a rental, but here’s the problem. We owe $88k+ on our 1st mortgage and $30k on our second, our home is worth less than $90k right now. our current payments total $1200+ per month and I know I can’t get anywhere near that for rent. I’d be interested in doing a loan modification if I could reduce what I owe and the payments. Will a loan modification effect my credit score?

  3. Jon - You packed a lot of questions into one post, but I’ll try to answer them.

    Short Sales have a two-part effect on your credit. The first part is how the short sale changes your credit profile and FICO score. The other aspect is how it changes your “mortgageability”.

    The jury is still out on how much the short sale actually hits to the score. Most people get a short sale done AFTER missing mortgage payments, so it’s not realistic to guess as to whether score changes are due to the short sale itself or the multiple mortgage lates on the credit profile. To get a true check, you’d have to pull credit prior to the short sale BEFORE missing any payments and then again AFTER the short sale once the closed mortgage trade line is posted to the account. (no significant changes in credit card balances, closed trade lines, or missed payments on anything else in the credit profile during this time as well to get an accurate measurement) This has been done a few times with results ranging from a 40 point hit to a 100 point hit in FICO score. How will it hit on your credit is unknown.

    The second aspect is more easy to touch on. Current FHA guidelines say “No New FHA Mortgage for 36 Months After a Short Sale REGARDLESS of Credit Score or Other Factors”. Pretty much plan for no new mortgage for 3 years after a short sale unless you want to go with a Hard Money loan and that’s going to be with about 35% down and at 15% interest PLUS 4-5 points charged on the front.

    If you NEED to move to a different home, it’s advisable to do so BEFORE you start falling behind on payments on the current home if you can. Once payments are late it’s almost impossible to get a loan on a new home.

    As to payments on the current home if you have a strong desire to keep it, you need to watch Episode 10 of the Short Sale Show (due out tonight) and evaluate if paying on the second mortgage makes sense for you at this time.

    I live in Taylor Michigan myself and my offices are in Southgate. If you want to set up an appointment to go over options based on your unique situation, then feel free to call the office at 734-284-5400.

  4. FWJ

    Brian,

    Watched all the episodes, tonight.. Love the info…

    I have seen lotsa sights and even a few brokers which are refering people to short-refi.com as loss mitigation and then hand back to broker for refi…

    have you heard if this is real? or a SCAM? Has any other readers used this service?

    they ask for upfront fees ~1K to start followed by another ~750 in fees after settlement recieved and then also want percentage of settled diff.

    Are these groups worth the money or do you think its better to attack with current lender by self.?

    I am severely upside down here in California, Owe ~640K NEG AM WORLD PICK PAY , Value w/ Zillow 345-430K

    ~45days late 1st+2nd

  5. FWJ,

    Short-Refi.com is a legitimate service as far as I know. I hooked up with them earlier this year and was actually going to work as one of their negotiators.

    Lauren,who runs that show, is a great guy and pretty hard working. I think something ended up happening over there though. About a month and a half back Loren had to go in to the hospital with heart issues. Ever since then, I’ve got no communication from his end. Truth be told, I’ve been a little bit too busy to follow up and find out what’s going o,n much less find out why no leads are coming in.

    That whole set up is based around independent negotiators across the nation helping out people in their immediate area negotiates short refi’s. Unfortunately, all bank negotiators are not cut from the same cloth. if you go through them make sure you ask for success stories from whichever negotiator is assigned to work with you.

    As to upfront fees, you’re going to be hard-pressed to find someone that knows what they’re doing who does NOT charge upfront fees. This is a long process requiring a lot of time and effort invested in each and every customer. Over the standard eight weeks it takes to negotiate a deal, things often change on the borrowers end which leads them to give up. When this happens the negotiator is out his time and often the time of an assistant, for which he now has no money to show for all his efforts.

    Being that you’re in California that’s a little bit different. The powers on high in your state have determined that the people that live there are not responsible enough to make their own decisions and thus have to be protected from themselves. California has some kooky law which makes it illegal ( or very difficult) to help homeowners facing foreclosure if you charge an upfront fee. This has resulted in many of the best negotiators refusing to do deals in California. Of course, that leaves you with unexperienced negotiators and/or unethical people who don’t care about abiding by the rules handling the majority of California short sales and short refinance negotiations. Currently I won’t touch a California deal with a 10 foot pole myself.

    As to your question about is the service “Worth the Money”, I think it should be self-evident to you. Let’s examine the facts.

    If your home is worth $350,000 and you owe $650,000 and you want to stay in the home, then a short refinance is really one of your only options. (Aggressive Loan Modification is as well, but that’s just an in-house short refi) if you’re already 45 days down then by the time the short refi reaches the end of the negotiation phase you have missed three payments. You’ll most likely have to get it done with an FHA Secure loan and with three payments missed in the last 12 months that means that you’ll only be able to get 90% loan to value. (miss for payments and you’re out of the game completely) In simple terms that means you’ll only be able to get a maximum loan of $315,000.

    For our example let’s forget that you will have significant closing costs ranging between 7% and 10% of your new loan amount that will cut the $315,000 down even further and just stick with the basic figure.

    If you owe $640,000 and your negotiator reduces the amount that you owe to $315,000, not only are you avoiding foreclosure but you are also back into your home with 10% equity AND you’ve also written off $325,000!!!

    Now when you got this loan I’m sure you really didn’t think about the fact that you took $640,000 one dollar bills and pushed them across the table on closing day after signing your mortgage documents, But that’s in fact what you did. It wasn’t Monopoly money, it was REAL money. The $325,000 write off is the same thing as having cash stuck in your pocket. This being the case, it almost doesn’t matter how much he charges you to get the job done…unless you are completely flat broke and can’t afford to pay anything (which I highly doubt if you are able to pick up a 640,000 mortgage).

    Again, let’s forget that there will be fees built in to loan itself, the cost of which will in essence be being picked up by your current lender, and figure that the negotiator charges you directly outside of closing for the entirety of his fee. If you are charged 25% of the amount of the reduction negotiated (which would be kinda high) you’d get a bill for $81,250.

    It’s at this point that you have to ask yourself how many opportunities in your life you will have to buy $325,000 with only $81,250. I’m sure after reviewing the numbers you probably wish this type of thing would come across your path every day.

    Remember, it’s not how much something costs but the value being given in exchange for the money that is important. What Bank Negotiators do when you boil it all down is we sell money at a discount AND save people from foreclosure all the same time.

    With the exception of a surgeon who saves someone’s life, there is nothing else out there that has more value than this.

    So the real question you should be asking yourself, my friend, is not “How Much Is This to Cost Me?”, but instead, “Can This Negotiator Actually Get the Job Done?”.

  6. FWJ

    BK,

    I first would like give you a super thanks, I am totally grateful for people like you that spend all the time you have to help others.. its truely inspiring. It makes me want to help others in my postion as well.

    Thanks for all your input…which brings me here….

    1. I Was only suspisious of the fees if they were scammers..I feel scammers dont deserve a penny of my hard earned money.. The fees I spelled out, only worried me if like I said. it was scam… I Will gladly pay if the task at hand can be accomplished.

    2. Can this, in you opinion be accomlished? Have you worked with Wahovia/World? are they acceptable to short refi/short sales? I was a a good payer before I stopped never a late Fico in the 700’s

    Keep in mind the numbers presented are based on market, Not, just what I am just asking for… it is reality.. there are short sales in my area that never got a single offer and now are sitting REO. continuing to drive prices down yet more.

    3. I already assumed we would have to go FHA Secure program…
    I think they were thinking 95% LTV… or keep it in house with wachovia, but I am not to sure how much they wanna keep any mortgages anymore as I think they are about to be hit heavily with people worried about all their NegAM Option ARMS…Such as mine… my home alone has ~60K in Added NEG AM SUM.

    4. Ultimately I guess the question is should I try to contact the loss mitigation @ wachovia and do something myself or cantact these guys to make it happen? Opinion..? I think I may already have my answer based on what I just asked.. like someone changing their own oil and asking, Where the engine is? But any insite is nice..

    Frank

  7. Frank,
    I would go ahead and try to get a short refi done.

    You can try to call your bank yourself, but they will either a) not know what you are talking about and be greatly confused, b) tell you to find a lender willing to give you the new money for the short refinance, or c) try to get you into a “loan modification” which would be anything from catching up missed payments and tacking them on at the end of the loan to lowering your interest rate to a full-blown in-house short refi.

    You’ll never know if you don’t call them.

    I just posted the first episode in my Short Refinance Bootcamp video series today. You may want to keep tuned as I post these throughout the next 10 days or so.

    Brian

  8. Marlene

    Hey Brian,

    Just started watching your series they are incredibly informative. I have been hunting for information like this for awhile.

    Here is my scenario, I own a home in FL which is an investment. My partner bailed out on me, and I had to stop making payments in April. I owe $560K and the house is worth about $280K. I have talked with EMC, who is servicing the loan for Bears and Stern, about a loan modification, their idea of a loan modification is just what you were saying bringing down the interest rate, and putting the missed payments on the back end of the loan. With this company I never seem to know if I am talking with someone who is giving me factual information or if there is another department that I should be dealing with. I started trying to work out this process 6 months before I went late on any payments and I got the run around.

    So my question is what can I actually do here? I was told I could possibly do a short refinance but at a 65% to loan value. The lender told me they would definitely 1099 me on a short sale, which I have one offer for the bank of $280K. If I do a deed in lieu of foreclosure will I be 1099 for anything?

    Since I don’t live in the property will I have the same options as owner occupied.

    Any light you could shed would be great! As I am in the final swirl heading down the toilet bowl.

    Thanks,
    Marlene

  9. Marlene,

    Here are some things that I see with your situation. Please note that I am not a tax advisor or an attorney, so you’ll want to touch base with someone on those lines to confirm on what I’ve got for you here. This insight is taken from my experience in Michigan and may not relate directly to your situation in Florida.

    1) Short Refinance - The whole 65% LTV thing is based on the idea that you might be able to get a hard money loan against the house. Here is the problems with that.

    ** a) Hard money is VERY hard right now. It’s usualy much lower than 65% LTV anymore. Like 60% or 55%. Almost all take credit scores into consideration and if you are down on payments and the loan is in your name, then you’ll have taken a beating.

    ** b) Both hard money and the bank taking the short are going to take NOW values into consideration when making their decisions. If EMC value checks the home at $290k and they will take 82% of that figure to settle short (we don’t know WHAT % they would take..just guessing here), then they would approve if they got a minimum of $237,800.

    However, if the Hard Money people approve at 60% LTV and they even value higher (fat chance of that) at $300k then they would only loan $180,000. In order to make the deal work you’d still have to bring $57,800 in cash to closing to make it work.

    You can’t refi with FHA Secure because it’s not a primary residence so that’s not an option. All in all, a short refi on an investment property has a very low probability of success, and because of that I won’t even work them.

    2) Short Sale - If you have an offer in at $280k and the bank’s value check comes in at $280k the there is a good chance that it should fly. If the bank’s value check comes in higher than $280k then it becomes more difficult. The higher their value comes in at, the more of a chance the deal will get a “No”. The lower their value comes in at the more chance they say “Yes”.

    3) Deed In Lieu - I don’t know if they’ll give you a 1099.

    4) 1099 In General - my understanding is that you won’t qualify for the Mortgage Indebtedness Relief Act on this one as it is not a primary residence. Which means any 1099 will count as income.

    You MIGHT be able to get an IRS Form 982 Insolvency exemption…but that would DEFINITELY be a question for a tax guy.

    Hope this answers some of your questions.

  10. Marlene

    Brian,

    I wanted to thank you for your time, and information that was incredibly informative. I have one more question for you. The lender agreed to modify the loan, they wouldn’t say how they were willing to modify the loan. Before they would modify the loan they wanted me to make payments for 6 months of an $3300, and then they said they would negotiate the loan. Is this the way it actually works or are they just trying to get you to throw more money at the loan.

    Thanks again,
    Marlene

  11. Michael

    Brian,

    The information you’ve shared on this post has been extremely valuable. I’ve been trying to figure out the right move to make regarding this issue, and finally found a company that had no scam incentives. I think that you guys have pointed out many of the similar issues to me, and wish that more people would be as knowledgable as you guys. They helped me at Housing Assist of America (housingassist.com), for anyone who needs a conseltation. I love the videos, keep em’ coming. Good Stuff.

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