Foreclosure Advice

Just in from CNNMoney; Trial Loan Modifications DO Hurt Borrowers' Credit

December 29, 2009 by Sasha C. Farmer Realtor · Leave a Comment 

Only weeks ago, I published a post with updated information from an advanced education class I was taking though the CRS (Certified Residential Specialist) program for Realtors, that was discussing different types of distressed sales and loan modifications to your mortgage, and how they would impact your credit score. In that class, we learned that borrowers were being told that taking advantage of the government HAMP (Making Home Affordable) program should not negatively effect their credit score, and that we should encourage borrowers to strongly consider this option before looking down the road of a short sale or foreclosure. Today, CNNMoney exposes several stories from people who have utilized the program, and whose credit scores are mysteriously dropping.

For some, a drop would be completely expected. For those who are behind on mortgage payments and who take the new mortgage arrangement, it is reasonable to expect that their credit would have already been damaged to some extent, just from the mortgage payments that had been missed. However, many other people have been encouraged to look at the HAMP program to re-arrange their mortgage and reduce their payments, even before they are behind on a payment. It is these people who have been squeaking by, trying to make ends meet and who have been making payments, who were being told (even by mortgage officers themselves) that their credit would not be effected. One of those stories is followed in the article today;

Axelrod, a municipal employee who lives outside Chicago, entered a trial mortgage modification program this spring.

He had not fallen behind in his mortgage, but he was finding it harder to make ends meet after his overtime was cut and his property taxes skyrocketed. Told it would not hurt his coveted 750 score, Axelrod secured a $565 reduction in his monthly payments.

Eight months later, Axelrod is still stuck in the trial modification, trying to satisfy his loan servicer’s endless requests for documents.

And to his horror, his credit score has plummeted to 644.

“It’s completely destroyed my credit,” said Axelrod. “If I had known it would affect my score, I would have never entered the program.”

Representatives at JPMorgan Chase (JPM, Fortune 500), which services Axelrod’s loan, are instructed to tell applicants that entering a modification could impact their credit histories, a bank spokeswoman said.

Despite his weakened credit score, there is at least some good news for Axelrod: After being contacted by CNNMoney.com, JPMorgan Chase said his permanent modification had been approved.

[From Trial loan modifications hurt borrowers' credit histories - Dec. 28, 2009]

According to CNNMoney;

The coding alone can impact credit scores, which measure a consumer’s financial health and range from 300 to 850 under the FICO system. The severity depends on how many payments the borrower missed before entering the program. Those who were current in their mortgages could see their scores fall up to 100 points, according to the Treasury Department.

[From Trial loan modifications hurt borrowers' credit histories - Dec. 28, 2009]

For now, it sounds as though a mortgage modification may still certainly have its benefits over a short sale or a foreclosure, if you want to keep your home. However, it is important for everyone to know that for what we can tell, it does not come as “risk-free” as it may have been advertised. This is sure to be a topic we’ll be hearing about more soon, but until then, please be sure to consult your tax advisor and your attorney for advice before beginning a mortgage modification program.

[Hat tip to Lani Rosales at Agent Genius for pointing out this important article.]

What is a strategic default?

December 23, 2009 by Sasha C. Farmer Realtor · Leave a Comment 

As defined by Wikipedia…

A strategic default is the decision by a borrower to stop making payments on a home mortgage despite having the financial ability to make the payments. Usually this occurs after a substantial drop in the house’s price such that the debt owed is considerably greater than the value of the property, and is expected to remain so for the foreseeable future. Such borrowers are called “walkaways.”[1]

[From Strategic default - Wikipedia, the free encyclopedia]

As discussed in CRS Course-111 on Short Sales and foreclosures, a strategic default will likely effect your credit score negatively by 140-150 points and will also result in 5-7 negative marks on your credit. This is likely going to be more detrimental than going through the process of a short sale or a loan modification, but is said to not effect your credit score as negatively as filing for bankruptcy.

**Disclaimer: I am a licensed real estate agent and cannot provide legal consulting or tax advice. For counsel on either of these things, please consult your tax accountant or attorney.

Before making any decision to pursue a short sale, a foreclosure, a strategic default, or to file for bankruptcy, it is in your best interest to consult with a licensed Realtor, your tax accountant, and an attorney.

Answer these questions to determine if purchasing a bank owned home/foreclosure is right for you…

December 23, 2009 by Sasha C. Farmer Realtor · Leave a Comment 

Please read carefully through the following items when trying to determine whether or not you are interested in looking at REO (Real Estate Owned) and Foreclosure properties.

1. Would you be okay with a delayed closing? Purchasers of foreclosures may have to wait for a significant amount of time before closing can occur. Are you on a tight deadline to get out of your lease? Are you attempting to take advantage of the Home Buyer Tax Credit (in which homes must close by June 1, 2010?) If so, this may not be the best choice for you.
2. If closing were delayed, would you be okay with re-applying for your loan and possibly losing your current loan lock? All during the time that we are awaiting closing, mortgage rates will be fluctuating, and if the loan lock deadline passes, you will have to re-apply for the loan and incur any related charges.
3. If closing is delayed, will you be able to adjust the timeframe for your date of possession? It is very unlikely that we will be allowed to occupy the property prior to closing, so you would need to have a backup residence in mind, in case of any delays. If this is your primary home, some sort of temporary living arrangement would need to be made, and it may include moving twice- from your current home to the temporary residence, and the temporary residence to your new home.
4. Even if the property is priced extremely competitively, do you have other funds that may be necessary for updating, cleaning up, and repairing the property? Sometimes REO and foreclosed homes will require a significant cash investment just to bring them up to standard living conditions.
5. Are you comfortable purchasing a home “as is”? Most REO and foreclosed homes will come in “as is” condition. A handful of them will not allow any sort of home inspection prior to purchase at all, however most allow a home inspection for information only. Would you be comfortable making any necessary repairs yourself (or with a contractor, of course) and after closing?
6. Would you be willing to sign addenda that heavily sways negotiations in favor of the Lender/Bank who owns the property and overrides most of the standard protections granted to the buyer? Most of these forms override rights that we outline in the standard Virginia Association of Realtors Residential Contract to Purchase. Oftentimes, the lender will allow no revisions to be made to these documents. Some of the changes that are often arranged in the addenda; tougher restrictions on the Purchaser, shorter timelines for the Purchaser to secure a loan, conduct a home inspection, etc, a larger deposit, deposits to be held in the escrow of the lenders choice, and very few provisions that will allow for the Purchaser to get out of the contract and many ways for the lender/seller to walk.
7. Would you be okay with getting up to the week of closing, only to find that the lender received another offer and has chosen to take that offer and void their contract with you? Many of the packages of documents that the lenders have you sign will include a provision allowing for this.
8. Would you be comfortable with your earnest money deposit to be escrowed with a escrow company or attorney of their choice? This money will not be accessible during the time that the property is under contract.
9. Are you prepared to do a title search and purchase title insurance? You will want to verify that the lender does hold title of the property (not all homes transfer from the previous sellers right away). You will also want to make sure that any liens that may have been held against the previous owners (who may have had difficulty paying many bills, aside from their mortgage) have been released and you will have the ability to purchase the home free and clear of liens and encumbrances.

If these items would not cause a major inconvenience for you, then you may be a perfect candidate to purchase a REO or foreclosure property- there are some incredible deals to be had!

Any more thoughts/additions to this list from others who have had bank owned/foreclosure homes?

Please do not hesitate to contact me if you’d like to be set up on a search that will send you foreclosure and bank-owned homes that might meet your search criteria!

How Much Will A Short Sale/Foreclosure Hurt My Credit?

December 23, 2009 by Sasha C. Farmer Realtor · Leave a Comment 

I have had a couple of people over the past few months mention that they may consider a short sale, so that they can just get out from under their homes and move on. While the ramifications of a short sale or foreclosure seem to be getting slightly more lenient in light of all of the predatory lending that has occurred in the past several years, they are still significant.

Here are some general credit score ranges (as provided by the National Association of Realtors CRS Course 111);

• 990: highest calculable credit score.
• 900: 15% of borrowers have a credit score at 990 or above.
• 740: a rough number around which people are usually able to get a good, competitive loan.
• 680: the average credit score.
• 501: lowest calculable score.
• 500: 18% of people have a credit score of 500 or below.

Let’s imagine that you have a credit score of 740 and own your home, but are having trouble making your payments (which may actually be causing your credit score to drop in the meantime). Here are a couple of different options, and their effects;

• A loan modification is said to have no negative impact on credit score.
• A short sale is estimated to impact your credit score between 120-130 points.
• A strategic default will likely impact your score by 140-150 points.
• A foreclosure is said to impact your score by 200+ points.
• Filing bankruptcy is likely to impact your credit score negatively by 355-365 points, putting even most prime borrowers below a score of 500. We are being told that it is still remaining on credit scores for up to 10 years.

Another crucial point to remember is that Virginia is a recourse state, which means that a short sale or foreclosure debt that is not forgiven by the bank, can be pursued later. This may result in credit collectors calling on you for years to come, to collect any remaining debt owed.

Let’s do what we can to help you avoid either of these results if possible. A really interesting fact to be aware of; According to the 11/03/09 issue of USA Today, only 9% of eligible homeowners have had their mortgage modified. There may be better options for you than a short sale or a foreclosure.

**Disclaimer: I am a licensed real estate agent and cannot provide legal consulting or tax advice. For counsel on either of these things, please consult your tax accountant or attorney.

Before making any decision to pursue a short sale, a foreclosure, a strategic default, or to file for bankruptcy, it is in your best interest to consult with a licensed Realtor, your tax accountant, and an attorney.