Faced with Foreclosure?

Recently, I received a call from a client who advised that they can not afford to pay the mortgage on their home. They are behind in their mortgage about 3 months. What should they do?

Firstly, what is foreclosure?

Foreclosure is the legal proceed that allows the lender to repossess (take back) your home. When this happens, you must move out of your house. If your property is worth less than the total amount you owe on your mortgage loan, your lender or HUD could seek a deficiency judgment against you. If that happens, you not only lose your home, but you also would owe your lender or HUD an additional (and possibly substantial) debt.Foreclosure or a deficiency judgment could seriously affect your ability to qualify for credit in the future so you should avoid it! In fact, foreclosure is worse than filing for bankruptcy.

When you buy a home by borrowing money from a financial institution to buy real estate, you sign a legal contract called a mortgage. A Mortgage obligates you to pay the lender on a certain day of the month until the loan is paid off. Also, there are other terms expressed in the mortgage contract but the most serious breach of contract happens when the borrower does not pay the mortgage payment.Then the financial institution is forced to begin the steps that can ultimately end with them obtaining the ownership of the real estate property. This procedure is commonly referred to as a bank foreclosure.In most of our minds, foreclusr conjures up imamges of the bank as an enormous heartless ogre kicking little old ladies to the curb on Christmas eve.

In reality, a bank foreclosure is necessary for the financial institution to maintain its integrity and to protect the interests of its investors, depositors and employees. It is also important to remember that bank foreclosure is a long and tedious process that provides ample opportunities for borrowers to negotiate with the lenders to find alternative solutions to bank foreclosures.

1. Don't lose your home and ruin your credit. If at all possible call or write your mortgage lender immediately.

If financial problems are looming, you need to notify your lender at the first sign of trouble and explain your situation - that would be as soon as you know you're going to start missing mortgage payments. Many lenders will give you time to help get your financial life back on track.

If your lender is sending you letters regarding the fact that payments have been missed, DO NOT IGNORE those letters. Be ready to give your lender your personal financial information, such as monthly expenses and income because, without this information, you will not receive much assistance. "Workouts" (as they are known) look better from a public relations standpoint and usually cost thousands of dollars less than full foreclosures and home repossessions.

2. Do not move out of your home. To qualitfy for assistance, remain in your home to AND make an appointment with a HUD-approved housing counselor for more optionsIf you move out of your home, the lender will assume that you have abandoned the property, and disqualify for you for assistance. Contact a HUD-approved housing counseling agency for information on services and programs that could help you. If you bought your home with a Veterans Administration (VA) guaranteed loan, call the VA office nearest you.

Other options include:

Special forbearance - is a written repayment agreement between you and the bank which contains a repayment plan to reinstate your loan. Your lender may be able to arrange a repayment plan based on your financial situation.

Mortgage modification - You may be able to refinance the debt and/or extend the term of your mortgage loan. In a modification, the lender actually adjusts the terms of the loan to make it affordable. Similar to credit card companies, a lender may adjust your interest rate and payment if you've experienced difficulties. Contact your lender and ask for the phone number to the "Loss Mitigation" Department. Lenders do not want your property; a Real Estate Owned is a liability to them.

Pre-foreclosure sale – allows you to sell your property and pay off your mortgage loan to avoid foreclosure, but with a damaged credit rating. You may qualify if the "as is" appraised value is at least 70% of the amount you owe and the sales price is 95% of the appraised value; the loan is at least 2 months delinquent prior to the pre-foreclosure sale closing date; and you are able to sell your house within a time frame agreeable toa lender.

Deed-in-lieu of foreclosure: As a last resort, you may be able to voluntarily "give back" your property to the lender. This won't save your house, but it will increase your chances of obtaing another mortgage loan in the future. You would qualify if: a.) you are in default, b) don't qualify for any of the other options; c) your attempts at selling the house before foreclosure were unsuccessful; and d) you don't have another FHA mortgage in default.

3. Cooperate with the counselor or lender trying to help youLenders really do want to help you to stay in your home - and they should be polite in trying to help you, the borrower, stay there. When there is a connection between the lender and borrower, the more likely it is that the borrower will try to stay in the home. Once a borrower is 16 days late, the loan servicer will try to get in touch with the customer at that point and figure out a way to bring the payment current. You can also contact Consumers Credit Counseling. The help is free or extremely affordable. Counselors can work with creditors to help borrowers make their installment payments (credit cards, for example) or even get them eliminated altogether. You should contact them early before things are too far-gone. Don't pay anyone for advice or service - most reputable credit counseling services provide free service.
Work with your lender. Don't keep your problems a secret.

4. Explore every alternative to losing your home. The lender may agree to help the borrower get rid of the house via a pre-foreclosure sale. In more dire circumstances, the servicer will agree to a "short sale." In such sales, the lender lets the borrower sell the house for less than the outstanding loan amount, takes the proceeds and forgives any remaining overage. Banks are willing to do so because they often lose less on these deals than they do in foreclosures.
Are there other ways you can try to pay your mortgage? Sure. Here are some drastic options but remember that these too can damage your credit and/or cause other problems if not handled correctly.

If all else fails ... Consumers who can't use any of these methods still have some choices. A debtor who can afford the normal monthly mortgage payment, but can't afford to make up the delinquent amount and legal fees because the lender is proposing a relatively stringent repayment plan, may want to consider filing Chapter 13 bankruptcy. Doing so temporarily halts the foreclosure process and can force the mortgage lender to accept a more borrower-friendly repayment plan, such as one that grants five years to repay the amount in arrears rather than one or two.

Around the 90th to 120th day is when the loan is reported to foreclosure and from that point on, two things are going on simultaneously. The foreclosure department is moving as quickly as possible to get to the foreclosure sale and the loss mitigation department is working with the borrower to try to do a workout. If the workout can be done before the foreclosure sale takes place, then everybody wins and the workout is done. If that can't be done, the foreclosure sale is held.Following the same logic, customers should try to negotiate the best deal they can get without feeling guilty. Someone whose property has fallen in value below the mortgage amount because of a neighborhood decline, for example, should consider pushing for a short sale or short refinance rather than a repayment plan. That way, the borrower doesn't pay more money than necessary. Nevertheless, the best way for consumers to get out of foreclosure without racking up extensive legal bills and ruining their credit histories is to start working on a solution before their problems get out of hand. DON'T IGNORE YOUR FINANCIAL PROBLEMS!

5. Don’t Be Fooled! Solutions that sound too good to be true usually are. If you're selling your home without professional guidance, beware of buyers who try to rush you through the process. Unfortunately, there are people who may try to take advantage of your financial difficulty. Be especially alert to the following:Equity skimming. Here, the "buyer" approaches you, offering to get you out of financial trouble by promising to pay off your mortgage or give you a sum of money when the property is sold. The "buyer" may suggest that you move out quickly and deed the property to him or her. The "buyer" then collects rent for a time, does not make any mortgage payments, and allows the lender to foreclose. Remember that signing over your deed to someone else does not necessarily relieve you of your obligation on your loan.Fake counseling agencies. There are some companies that call themselves "counseling agencies." They offer to perform certain services for a fee, that you could do for yourself, for free, such as negotiating a new payment plan with your lender, or pursuing a pre-foreclosure sale. If you have any questions about paying for these services, call a HUD-approved housing counseling agency. Do this before you pay anyone or sign anything.

6. Do not sign anything you don't understand. Remember that signing over the deed to someone else does not necessarily relieve you of your loan obligation. Don't sign any papers you don't fully understand.

Always, check with a lawyer or your mortgage company before entering into any deal involving your home.

Good Deeds


Time and again, I am often posed with a question of whether or not it is a good idea to add a child’s name to the deed of a family home. Normally, with the client’s interest first and foremost as opposed to the child’s interest, we usually advise that it is better not to add names to the deed to a home. Many clients, however, are concerned about saving their children the inconvenience and cost of estate administration. If a parent chooses to have the family home passed to a child or children upon his or her death, many parents think that it wise to add the name of a child to a deed while he or she is alive hoping to save probate costs and inheritance taxes. This decision should be made on a case by case issue.

Issues, such are these, need to be decided on a case by case issue where the pros and the cons are carefully weighed particularly to the client’s issues. One of the issues that client’s should think about are:

1. Control. This is the paramount consideration when considering this type of issue. Once a person’s name is on a deed, that person’s consent must be obtained before doing anything with the property. For example, if a person thinks he or she may want to sell the house for whatever reason, that person will need to have the child’s consent before that house can be sold. If the child is married, the signature of the child’s spouse on the deed before selling may be necessary or else it would be impossible to obtain title insurance.

2. Consider tax consequences. Federal estate taxes cannot be avoided between non-spouses. Therefore, if the property is valuable enough to be taxed, the tax is unavoidable just by adding the name of a child to the deed. If the property is not of such a high value, there would not be any federal estate taxes anyway.

To add a child’s name to a deed may have potential gift tax consequences depending on the value of the property. It should be noted, however, that it may still be necessary to file a gift tax return even if there is no actual gift tax due because of the combined of the gift/estate tax exclusion.

Also consider that if the child should die first, the client may have to pay estate taxes.

The child should also consider any type of tax issues that may arise. Commonly, to avoid estate taxes, a client may forget the matter of capital gains taxes that the child may have to pay when he or she sells the property. If the property is received as a gift, there is no “stepped up basis” as there is in inheritance. Consequently, if the property value when sold is higher than the basis of the parent donor, the child would have to pay tax on the gain which might well exceed the inheritance tax and probate cost.

3. Do not forget to consider loss of benefits. If the client is eligible for state property tax rebates, a transfer of all or part of the property, even though they remain in possession and pay all expenses themselves, may waive the right to a tax rebate in proportion to the interest transferred.

4. Lastly, consider Medicaid eligibility. When applying for Medicaid long-term care benefits, gift transfers that are made within the last 36 months will be scrutinized and may delay eligibility. Certain regulations allow an applicant to rebut the presumption that a transfer of assets for less than fair market value was for purposes other than avoidance of Medicaid eligibility; however, it can be a difficult and time consuming problem, perhaps requiring administrative hearings.

Therefore, when thinking of adding another name to a deed, careful considerations should be made.