The Adam Lee Team Alternatives to Foreclosure & REASONS WHY SHORT SALES ARE THE BETTER SOLUTION!

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1 The Adam Lee Team Alternatives to Foreclosure & REASONS WHY SHORT SALES ARE THE BETTER SOLUTION!

2 Options When Facing Foreclosure 1. Do Nothing: If you choose to do nothing, you will most likely lose your home. Your credit report will disclose this damaging information for years to come. This is certainly not the best option! In fact, in today s society in the United States, this could be your most detrimental move. Let us explain. By law, the lender has the right in Arizona to file Notice of Default, at the point where you become 30 days late on your mortgage. This is specific to the remedies available to them that are outlined in the NOTE and Deed of Trust that was signed by you at closing. Notice of Default is the official public notice that banks in Arizona file against a homeowner, notifying them that they home is being processed for Trustee Sale. Although it takes 90 days to process the notice of default until the trustee sale, where the home will actually be put up for bid, the damage to your credit has already begun. As professionals in the industry, with relationships in many strategic areas, we have found that ALL lenders in the United States look at a foreclosed on property, or even a mortgage delinquency over 120 days on a credit report, as the worst situation a person can be in, and the consequences to a foreclosure or 120 days late or more on your mortgage mean that the bank will not lend money to you again for a home loan for at least 4, possibly up to 7 years in the future. Now, most of this is public information, but many people are not aware of it, and they tend to just allow things to happen, and it results in them getting more and more damage to their credit, which causes them future harm significantly beyond what might happen if they act proactively. or Tax Attorney), as there could be consequences in both of these areas when you are in a distressed property, or default, or foreclosure situation. The potential risks that you face are state specific, and are ever changing.

3 2. Payoff or Refinance: You may completely pay off the entire loan amount you owe your bank(s) plus any default amount and fees or you could refinance the current loan. The new loan you get could have a higher interest rate and there may be a pre-payment penalty because of the recent default. The important thing to know here is that with this option, there would have to be equity in your home. For most borrowers today, the likelihood of having equity in the home is much lower in than in recent years. We have found that in Maricopa County, in the Phoenix, Arizona area, about 65% of homeowner s are underneath their homes, meaning, they owe more than their house is worth. This limits the bank s ability to refinance or offer any solutions, simply due to the fact that they base their lending solutions on LTV. LTV is Loan-To-Value basically, it s opposite of the equity position on the home. Example 20% down would create an 80% loan-to-value in a traditional purchase. So, 20% down, plus 80% LTV is 100% of the purchase price. If you have an 80/20 loan, then your loan to value is 80%, and you CLTV, or Combined Loan-to- Value is 100%. Loan-to-Value is the primary criteria that banks use to identify the borrower s risk level. Although, credit score, job history, debt ratios and many other factors play into their lending philosophies, the LTV establishes the money they are putting down, or might be required to put down. In identifying a refinance loan, or the qualification for a refinance, most borrowers today face an LTV limitation of no more than 80%, in some rare cases up to 90%, but it s much more restricted than it was in the past, specifically during the Alt-A boom of 2005 and FHA lending offers an option to its borrowers called a Streamline Refinance. This option states that if you are current on your mortgage at the time of close, you are eligible for a rate reduction. In doing so, there is no requirement during the refinance process to do an appraisal, thus they effectively say that it doesn t matter if you have an equity position, or if you are underneath your home s value, they will offer a reduced rate in order to help you stay current on the mortgage. This is counter intuitive to traditional, conventional lending practices that are much more conservative, and profit based. FHA is known for its function of wanting to improve communities, and they do so by keeping people in homes.

4 3. Reinstatement: You may pay the entire default amount plus interest, attorney fees, late fees, taxes, and missed payments and reinstate your loan (bring your loan current). It s important to know that there may be other considerations in re-instating the loan. Our recommendation is that when you re-instate the loan, you get professional legal advice before doing so. We ve seen many borrowers attempt to re-instate their home loans only to still be foreclosed on, simply because there were other fees and considerations that were not clearly communicated to them by the bank, or that they did not understand in their dialogue with the banks. Many times, the collections departments at the banks handle the negotiations on reinstatements, so there is not always clarity on fees, taxes, interest charges, delinquency fees, attorney fees, taxes and the like. Thus, at times, a borrower may catch up back payments, but not know about the other fees, and they will think they have re-instated the loan, but the lender will still foreclose on the property simply because the re-instatement was not 100% complete. It is highly recommended in all situations, with any bank, and with any potential solution that you have the bank provide you written proof of any and all agreements that make with them. Our recommendation is to have them put the offer in writing, even before executing the agreement.

5 4. Loan Modification: A loan modification is a permanent change in one or more of the terms of your loan and can sometimes result in a lower payment for you. Contrary to popular belief (media exploitation), most people do not qualify for this alternative and most banks don t want to help you with this option. Now, it s important to know that the it s not that the bank doesn t actually WANT to help you, they are just ill-equipped to handle the volume of delinquent loans in this distressed property market, and they have red-tape, bureaucratic processes that have proven to be very ineffective. The United States government constantly puts out new legislation that is designed to provide loan modification solutions to homeowners. But, as with any government legislation, many times these solutions offerings have limitations, and very stringent restrictions for qualification. Example: The HARP, HAMP and HAFA programs have all been rolled out recently, and they have been generally massive failures. It doesn t mean they have not helped anyone, but as a whole, they didn t even scrape the expectations that they had planned on in helping massive numbers of homeowners. Loan modification solutions can include many of the following, but are not limited to: - Reduced interest rate permanently - Reduced interest rate for a period of time - Temporary reduced payment - Permanent reduced payment - Waiver of late fees, and other fees - Temporary deferment of payments - Forbearance see point # 5 below It s also important to seek legal counsel (Real Estate Attorney), as well as tax help(cpa

6 5. Forbearance: A forbearance is an agreement made between you and your bank in which your bank agrees not to exercise its legal right to foreclose on your home and in which you agree to a payment plan that will bring you loan current over a certain time period. Information will be required from your bank to show that you are able to meet the new payment plan requirements. The details of these types of solutions for homeowners are not very well known, or published historically, so we recommend that you get professional counsel in situations like this. It s also important to seek legal counsel (Real Estate Attorney), as well as tax help(cpa 6. Partial Claim: A partial claim is a loan from your bank for a 2 nd loan to include back payments, costs and fees. Under the partial claim option, a bank will advance funds on behalf of you in an amount necessary to reinstate a delinquent loan (not to exceed the equivalent of 12 months PITI). The bank will execute a promissory note and subordinate (2 nd ) mortgage. Such loans are due in full and payable when you either pay off the first mortgage and/or no longer own the property. It s also important to seek legal counsel (Real Estate Attorney), as well as tax help(cpa

7 7. Deed in Lieu of Foreclosure: A Deed in Lieu of Foreclosure is a disposition option in which you voluntarily deed the home back to your bank in exchange for a release from all obligations under the mortgage. A Deed in Lieu of Foreclosure may not be accepted from homeowners who can financially make their mortgage payments. The consequences of this option are nearly as severe as that of an actual foreclosure and there are certain eligibility requirements for this option as well. There are many possible scenarios to qualify for a deed in lieu, and there are many considerations that you will want to be aware of. In some cases, the lenders may offer you money for such an option, but it s important to know that you need professional counsel with this option, as well as it s necessary to get things in writing from the lender or bank before executing such an option.

8 8. Bankruptcy: Bankruptcy is an option that can liquidate debt and/or allow more time for you to stay in your home. There are several types of Bankruptcy and you would need to consult a qualified Bankruptcy attorney for more information -Chapter 7 (Liquidation): Completely settles personal debt. -Chapter 13 (Wage Earner Plan): Payments are made toward a plan to pay off debts in 3-5 years. -Chapter 11 (Business Reorganization): A business debt solution.

9 9. Sell the Home: There are 3 ways for you to sell your home if facing foreclosure a) Sell with Equity: If your home has equity (money left over after all loans and monetary encumbrances are paid), you may sell your home without lender approval through a conventional home sale. In this case, you could get cash from the sale proceeds. b) Sell with No Equity/Short Sale: If your home does not have equity, it is still possible to sell your home through a transaction called a Short Sale. Simply put, a Short Sale is used to describe the sale of a home in which the homeowner owes the bank more than the home is worth. The bank agrees to allow the home to be sold for less than what is owed (AKA Short Sale ) with the help of a Real Estate Professional. c) Sell the home with Seller Finance: Seller finance has been an option for sellers for many years, although it s not as common as conventional finance. Seller finance is a specialized type of transaction, so it is recommended to work with a team like the Melville Team that has extensive experience with these types of transactions. It s especially important in a distressed property situation, or a delinquent mortgage situation. One of the most important aspects here is how to handle re-instatement of the loan, and this is likely based on the ability of a potential buyer to bring a down payment to the table.

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