Every day, thousands of homeowners either lose their homes or make it one step closer to losing their home. With so many homeowners struggling with an underwater property, I decided to create a simple, six-step plan to help homeowners figure out how to get rid of their real estate.
The following advice is based upon my experience as a real estate attorney, advising hundreds of property owners about their distressed real property.
If your home is in pre-foreclosure or you’re considering a short sale, you can follow the following steps:
Put Yourself in your Bank’s Shoes
Banks are simply overwhelmed by the amount of homes in default or already foreclosed on which are now back in the bank’s hands. Many banks have so many homes they’ve already foreclosed on that they simply can’t put them all on the market at once or else it will flood the market and drive down prices further. Although banks initially simply didn’t have the resources to deal with so many homes, they’re starting to catch up. Wells Fargo has reported hired more 8,000 new employees since the start of 2009 to handle short sales, loan modifications and other issues associated with distressed properties. As a result of the huge amount of distressed properties, banks are highly unlikely to grant any change to the existing terms of a loan unless they are convicted it is absolutely necessary — simply because they are so overwhelmed by other, more urgent homes in default.
Consider Foreclosure vs. Short Sale vs. Loan Modification
The next step is to consider your options. Foreclosure is the worst case scenario, and most damaging to your credit. In a foreclosure, a bank takes back title to a property after its borrower has broken the terms of its lending agreement. If you had any equity in the property, you will lose it. A “short sale” is when a bank agrees to accept less than the amount owed. With a short sale, you can negotiate with the bank so that it doesn’t have as much of an impact on your credit. A short sale is like a “C+” or a “C” on your credit, whereas a foreclosure is like an “F.” You are not “losing” equity because the property has dropped so significantly that the property is worth less than what is owed. A “loan modification” is a general term referring to numerous ways in which a bank may modify the terms of your loan. Typically, the bank agrees to a lower monthly payment for a term between 12-60 months. A loan modification can have little or no impact on your credit rating.
Do you Need Professional Help, Or Can You Handle It On Your Own?
Many people are organized enough and have enough time free to negotiate with their lender. On the other hand, oftentimes people got into the mess they’re in because they were unable to cope with the incredibly detail-heavy responsibilities of negotiating with their lender. If you’re in the latter category, you may benefit from hiring professional help. Even if you don’t hire an attorney or an accountant, you may want to get a family member or a friend to help with organizing your documents and drafting the hardship letter.
Organize your Financial Documents
The next step is to put together all of your financial documents which you will need to provide to your lender, whether you are attempting to avoid a foreclosure, a short sale, or a loan modification. You will need the last two years’ tax returns, last two years’ W-2’s, and the last three months of bank statements and proof of any income. You will also need to start drafting a “hardship letter” which needs to tell a compelling story of any hardships in your life which have put you in your current situation.
Contact Your Lender
The next step is to contact your bank’s ‘loss mitigation department’ to discuss the possibility of a short sale. A bank is highly unlikely to even consider a short sale unless you are at least 3 months delinquent. The reason for this is because banks have so many borrowers who are 6 or even 12 months delinquent, they’re focusing their resources on these delinquent borrowers. Why would the bank agree to accept less than the amount owed from a customer who is current on their payments? From the bank’s perspective, it doesn’t seem like the borrower needs the help. You should ask the bank to send you their “short sale” or “workout” package. You will probably have to send back a signed Release as well as the financial documents outlined above.
Follow Up, Follow Up, Follow Up
The final and most important step is to keep following up with your lender. It is highly likely your bank will “lose” your documents numerous times through the process. You should always keep copies and track the fax numbers, email addresses and postal addresses you send documents in to, along with names of representatives you contact. Be Patient. This process will take will take time — at least 3-6 months, likely more if your home is worth more than $500,000 or located in an area with a lot of distressed properties. Have a good sense of humor and pay attention to details and you will get through it.