Foreclosure Workout Recommendations
Use the following information to help choose the right foreclosure workout plan based on the type of loan or mortgage you have. Then learn how to put together a Foreclosure Workout Case File!
Conventional loans are normally sold on the secondary market. This means you may end up paying more than one lender during the life of the loan. These various investors have a vested interest in your loan and may be influential in helping your get your loan servicer to agree to a workout solution.
Be aware that you could lose your VA eligibility if a compromise sale, Deed-in-lieu, or Foreclosure is completed. The exception is when VA executes a release of liability, or the deficiency is paid in full.
Contact the VA for advice and help in finding community or government assistance programs willing to help borrowers in financial difficulty.
Federal Housing Administration
FHA actively encourages lenders to mitigate solutions with the purpose of keeping borrowers in their homes and the cost of foreclosures at a minimum. FHA provides lenders with a monetary incentive when a lender works out a solution with a borrower.
Second mortgages are liens recorded behind the first mortgage. If you are delinquent on a second mortgage and unable to reach an acceptable solution, the second-mortgage lender may foreclose. If so, this lender is then responsible for keeping the first mortgage current. If the foreclosure process is completed and there is a deficiency balance remaining on the second, the mortgagee may not collect it in states that allow non-judicial foreclosure.
However, the second mortgage can become an unsecured loan, and therefore collectable, under the following combination of circumstances:
- The first mortgage is delinquent.
- The holder of the first forecloses.
- There is not enough money after the auction to cure the second.
The holder of the "second" then has access to the normal court process for collecting the deficiency as unsecured debt: lawsuit, judgment, wage garnishment.
In the case of a short sale, a second note holder may consider a settlement or reaffirmation of the loan because he knows his risk of loss is high.
Title I home improvement loans have different restrictions depending on the type of first mortgage:
- If the first is an FHA loan, the Title I loan must be treated differently when a pre-foreclosure sale occurs. They may accept $2,000 to settle, or they may want to reaffirm as an unsecured note.
- If the first mortgage is a conventional or VA loan, Title I may require as much as 50% of the balance owing up front and carry back an unsecured loan on the remaining 50%.
1. You can use the same types of workout solutions for delinquent second mortgages as for delinquent firsts.
2. If property value is upside down and the 1st lender is foreclosing then the . . .
- 2nd lender has the ability to stop a short sale.
- 2nd lender may accept partial repayment (offer in compromise).
- 2nd lender may agree to rewrite note as unsecured loan.
- 2nd lender may pursue judgement and garnish wages.
3. If 2nd lender forecloses
- They must keep the 1st mortgage current.
- If foreclosure is completed they must pay 1st lender before paying any monies to themselves.
- They cannot pursue deficiency balance, if any.
Tax Consequences of Foreclosures/Short Sales
It is important to remember that when a homeowner must utilize the short sale, deed--in-lieu option, or a foreclosure takes place, the IRS requires all lenders to send a 1099 Income Earnings Statement to all borrowers on the note for any deficiency balance (forgiveness of debt according to the IRS) in excess of $600.
This must be reported on the borrower's tax returns as income and taxes may be assessed. The exception would be for a purchase money loan (an original loan when the house was purchased, and no refinance has taken place), or when insolvency can be proven and the IRS determines the tax liability should be waived or lowered. In either case, a CPA knowledgeable in short sales and foreclosures is essential.
Credit Report Implications
There are levels of severity, but how a future lender views your current situation depends upon how well you documented the hardship, how you have overcome it, and what other compensating factors you now have to offset the derogatory credit history.
Even if you end up keeping your home, your credit report will probably show 30, 60, 90-day late payments. Payment histories are reported for seven years unless it is a matter of public record, such as a judgment, which remains on the credit file for 10 years.
A short sale may or may not show on your credit report but is generally not considered very harmful since you took positive steps to remedy your situation.
A foreclosure is probably the worst rating that can appear on a credit report. A deed-in-lieu of foreclosure is only slightly better. Both will stay on your credit report for seven years. You usually must wait about three to four years before buying another home at competitive interest rates.
Reestablishing a good credit history is imperative. This can be done with an excellent payment history on a new credit card, timely utility payments, and/or satisfactory rental payment records. If you have trouble obtaining an unsecured credit card, seek out a secured card.
Finally, it is a good idea to file a "Consumer Statement" (a short 100 words or less hardship letter explaining your situation) with each credit bureaus. The explanation remains as long as the items show on your credit report. There is no charge for filing this statement and the credit bureaus must help you write the statement if you request their help.
It's a good idea to keep a copy of your hardship letter with your payment records, in case you need to recall this information at a later date.
Learn how to put together a Foreclosure Workout Casefile!