After reading this week's material, consider, research and address the following: Please conduct independent Internet research on the most recent mortgage foreclosure crisis. This crisis impacted both

CHAPTER 14 Ten-Plus “Must-Knows” About Foreclosure 221 Chapter 14 IN THIS CHAPTER »Opening your eyes to your situation and options »Knowing the best sources for objective information and advice »Understanding the realities of foreclosure investing Ten-Plus “Must-Knows” About Foreclosure L enders have a contractual right to take over ownership of a property (fore- close) if the borrower can’t make required payments. Even in the best of times, some foreclosures occur, but the number of foreclosures accelerates during soft real estate markets or because of risky loans. From 2006 through 2010, the number of foreclosures increased tremendously as real estate prices declined and numerous borrowers found themselves saddled with high-cost mortgages\ .

In Las Vegas, home prices plunged by more than 60 percent from early 2006 to 2011 — the greatest percentage decline in home prices of the 50 largest metro- politan areas in the nation. With that incredible decrease in home value, it’s easy to understand the record number of home foreclosures because many homeown- ers who hadn’t owned for long found that they were living in homes worth less than the amount they owed on their mortgage.

Having the home in which you’re living end up in foreclosure is a nasty, unpleas- ant experience for most folks. In most instances, homeowners become overex- tended with their bills or lose some or all of their income(s) and simply can’t afford to muster their mortgage payment. Meanwhile, some homeowners whose properties end up in foreclosure aren’t in dire financial straits. Instead, they choose to walk away from a property that dropped in value and is worth less than the outstanding mortgage amount. As we note in Chapter 3, either course of action Griswold, R. S., Tyson, E., & Tyson, E. (2017). Mortgage management for dummies. Retrieved from http://ebookcentral.proquest.com Created from apus on 2020-05-21 07:43:19.

222 PART 5 The Part of Tens will probably have severe repercussions on your credit score and ability to borrow in the future.

In other cases, overextended investors walk away from multiple properties that declined in value. (This was the major factor in the Las Vegas market crash with more than 40,000 homes being purchased by investors seeking rapid appreciation only to see the market plummet.) Instead of continuing to make payments on property that’s worth less than they paid for it, some investors cut \ and run.

Although we feel sorry for some investors caught up in the pre-2007 frenzy of speculative buying of rental homes, this chapter is really geared to homeowners who may be in danger of losing their home to foreclosure. Some tips also apply to folks attracted to investment opportunities on property in foreclosure. While the number of foreclosures is significantly lower throughout the country since 2010, some homeowners are going to be unable to meet their loan obligations and a short sale or foreclosure is in their future. Deal with Reality Just as a lot of folks do when consumer debt (on credit cards and auto loans) gets overwhelming, many people falling behind on their mortgage payments want to run and hide. Mortgage statements and bills go unopened and calls from the lender go unanswered and unreturned. Some folks with excessive credit card bills do the same thing. Sticking your head in the sand when it comes to mortgage pay- ments does you no good. You’ll lose your home if you don’t take ac\ tion now.

The sooner you contact your lender and level with them about your problems, the better. Explain your financial situation, debt burdens, and what you can afford to pay monthly on your mortgage. That said, don’t allow any person at a financial institution to berate or verbally abuse you. Find a way to do the best you can. Avail yourself of financial counseling and try negotiating better mortgage terms (we cover both of these topics later in this chapter).

Heed this sage advice from veteran mortgage professional Chris Bruno: Whether one is in foreclosure, contemplating foreclosure, or buying a fo\ reclosed property, getting competent professional help early in the process is ex\ tremely important for a more favorable outcome. I have seen many people come to \ me at the 11th hour having never responded to the foreclosure documents from t\ he lender. Needless to say, it’s very stressful, and the delay only limi\ ted their options and made the whole process much more expensive.Griswold, R. S., Tyson, E., & Tyson, E. (2017). Mortgage management for dummies. Retrieved from http://ebookcentral.proquest.com Created from apus on 2020-05-21 07:43:19.

CHAPTER 14 Ten-Plus “Must-Knows” About Foreclosure 223 Review Your Spending and Debts The first step in taking the bull by the horns when you’re drowning in mortgage debt is to zoom out to 30,000 feet and look at your entire financial situation.

Tabulate all your debts and spending. Identify expenses you can most easily reduce. Although your housing expenses are a significant portion of your total expenditures, they’re probably less than the majority of your typical monthly expenses.

Complete the worksheets in Chapter 1 of this book to help you identify ways to reduce your spending and debts, including consumer debts. For detailed assistance with analyzing your spending and debts, see the latest edition of Eric’s Personal Finance For Dummies (Wiley). Beware of Foreclosure Scams Perhaps the only thing worse in the real estate world than falling behind on your payments and entering the foreclosure process is falling prey to the circling vul- tures trying to take advantage of your hardship and lack of financial knowledge.

In the late 2000s, increasing numbers of scoundrels and hucksters made claims that they could stop foreclosure no matter what the situation. After charging fees of $1,000-plus and doing little if anything, in the worst cases, unsuspecting homeowners sign over ownership of their property (and begin making rental pay- ments) to the con artists!

Only make use of counselors approved by the U.S. Department of Housing and Urban Development (HUD). We explain how to find these good guys and gals in the “Make Use of Objective Counseling” section, later in this chapter. Consider Tapping Other Assets As long as you’re not going to declare bankruptcy (check out the “Understand Bankruptcy” section, later in this chapter), you should make a list of assets you might tap to help meet your mortgage payments. These assets may include bank saving accounts, mutual funds, stocks, bonds, cash value life insurance policy balances, 401(k) plans, unneeded personal property you could sell, and so on. Be sure you fully understand all tax consequences before liquidating any investments to help make mortgage payments.Griswold, R. S., Tyson, E., & Tyson, E. (2017). Mortgage management for dummies. Retrieved from http://ebookcentral.proquest.com Created from apus on 2020-05-21 07:43:19.

224 PART 5 The Part of Tens In the unlikely event that you’ll file for bankruptcy protection, don’t use the pro- ceeds from your other assets for home payments. The reason: You may be able to protect and keep those other assets if you file for bankruptcy. Make Use of Objective Counseling A number of nonprofit organizations offer low-cost or free counseling to home- owners in danger of losing their homes to foreclosure. The best way to find those agencies is to contact the U.S. Department of Housing and Urban Development (HUD) “housing counseling agency locator” at 800-569-4287. Select the option for mortgage delinquency counseling and then enter your five-digit zip code to obtain the name and phone number of approved counseling agencies near yo\ u.

Alternatively, you can visit the HUD website ( www.hud.gov ) and then click the HUD Approved Housing Counseling Agencies link under the Resources tab on the home page. In addition to helpful articles, the website enables you to find multiple area counseling agencies. Negotiate with Your Lender Smart lenders don’t want your property to end up in foreclosure, especially if the mortgage balance exceeds what the lender could reasonably expect to net (after selling and other expenses) from selling the property. If your current mortgage terms appear to doom you to foreclosure, contact your lender immediately and plead your case to have your loan modified. Sure, the modification will hurt your credit, but it’s likely already damaged if you’re facing foreclosure. Also, remember that the modified (lower) payments may help you keep your home while you rebuild your credit.

You also may want to see whether you qualify under the specific and limited con- ditions for borrowers seeking to restructure or refinance homes with low equity, no equity, or negative equity (the home is worth less than the loan). You may qual- ify for a government program, such as the Home Affordable Refinance Program (HARP), that allows homeowners to refinance their loan. Note that these pro- grams are constantly evolving and the terms may change periodically, so you need to continually see whether you qualify. For example, the HARP program started in 2009, but by late 2011, it was modified and referred to as HARP 2.0. Then, Presi - dent Obama proposed further changes and a revised HARP 3.0, but Congress never approved that proposed program. Our point here is that you’ll hear a lot of hype about government programs that will solve all your problems. Be cautious and Griswold, R. S., Tyson, E., & Tyson, E. (2017). Mortgage management for dummies. Retrieved from http://ebookcentral.proquest.com Created from apus on 2020-05-21 07:43:19.

CHAPTER 14 Ten-Plus “Must-Knows” About Foreclosure 225 skeptical, but seek the advice of an objective counselor (as we suggest earlier) as there may genuinely be some help out there for you.

For ideas on how to customize your current loan terms to help you afford your home, consult with a local HUD-approved counselor, as discussed in the previous section. Most lenders can make your current loan more attractive through a modi- fication (by reducing the interest rate or changing the rate to a fixed-rate from an adjustable, for example) if doing so will keep you out of foreclosure and keep you making monthly payments. Understand Short Sales If your home is worth less than the amount you owe on the mortgage(s), it is said to be underwater or upside down. You may think you can’t sell the home because you won’t clear enough money to satisfy the lender(s), real estate agents, and closing costs, and therefore foreclosure is the only option. But, thankfully, you can opt for a short sale.

A short sale means you can sell your house (avoiding foreclosure) and pay off the lender(s) for less than what they are owed. The lender(s) is getting a payoff that is “short” of what it is owed — hence the name short sale.

The lender has to approve a short sale, but it happens regularly. Why would the lender do this? Because it’s easier and less expensive for them than processing a full foreclosure. Why would you do this? Because, compared with foreclosure, it is better for your credit (see the “Consider the Future Impact to Your Credit Report” section later in this chapter.) Seek Legal and Tax Advice If you’re confronted with or considering foreclosure, talk to an experienced real estate lawyer and tax advisor before you agree to a foreclosure or short sale (see the preceding section). In fact, seek their advice before you even start skipping mortgage payments. There are state and federal laws involved, and you need to know »If the lender loses money on the foreclosure or short sale, can they com\ e after you for the difference (called a deficiency judgment)? This varies from state to state and is a question for the attorney. Griswold, R. S., Tyson, E., & Tyson, E. (2017). Mortgage management for dummies. Retrieved from http://ebookcentral.proquest.com Created from apus on 2020-05-21 07:43:19.

226 PART 5 The Part of Tens »If the lender loses money on the foreclosure or short sale, can the IRS \ tax you on the amount the lender loses? It may sound crazy, but the IRS may cons\ ider the loss that the lender suffers (which they write off) as a taxable benefit to you. It is called debt relief. This may or may not apply at the time you’re reading this, so find out by asking your tax advisor. Understand Bankruptcy To make the best decision you can, consider a range of options. When mortgage and other debt prove overwhelming, bankruptcy is one option you should explore and better understand.

Bankruptcy is usually used to eliminate miscellaneous unsecured revolving debts (like credit cards) so you have more money with which to make mortgage pay- ments and keep the home.

The biggest challenge with considering bankruptcy is finding unbiased sources of information and advice. Some supposed counselors won’t discuss or recommend it to you; others, such as bankruptcy attorneys, often have a bias at the other end of the spectrum. Truly independent or the HUD-approved counselors recom- mended earlier in this chapter are a good starting point.

Be careful if the financial counselor or advisor is affiliated with a “credit repair” service or a “bankruptcy mill” because his solutions are almost guaranteed to be the products offered by his own or an affiliated company. Consider the Future Impact to Your Credit Report Folks who make little if any effort to find a solution to their housing debt woes and who choose to walk away from a property that’s proven to be a loss from an investment perspective often suffer consequences down the road. Before taking this step, think for a moment about the long-term consequences. If you were a lender, how motivated would you be to lend money to someone who threw in the towel without working to find a solution? And if you did lend such a person money, would you give him or her the best loan rates and terms that you give folks with excellent credit histories? Griswold, R. S., Tyson, E., & Tyson, E. (2017). Mortgage management for dummies. Retrieved from http://ebookcentral.proquest.com Created from apus on 2020-05-21 07:43:19.

CHAPTER 14 Ten-Plus “Must-Knows” About Foreclosure 227 Roll up your sleeves and work with your lender and talk with counselors to find a solution that will enable you to keep your property. Remember that the lender is best served by having the property occupied by an owner who will continue to prop- erly maintain the home. Use that argument to your advantage because the lender will very likely suffer added costs and expenses (such as insurance) if the home is unoccupied for an extended period of time. Many municipalities are well aware that these vacant homes aren’t being properly maintained and are an invitation to squat- ters and crime. They have passed new laws allowing for significant fines and penal- ties if these homes become a blight on the neighborhood. Your credit report may still suffer damage, but you can minimize the fallout both now and in the future.

Two of the biggest questions after a foreclosure, short sale, or bankrup\ tcy are »How long before my credit recovers?

»How long before I can get a mortgage again? Regarding the first question, most lenders don’t want you to know that it only takes two to three years (of effort) to rebuild your credit scores to a level worthy of a new home loan. As far as credit cards, auto loans, and other loans? You can get those very quickly after problems on your credit report.

As for getting a loan to buy another house, different types of loans require differ- ent waiting periods before you’re eligible to apply for a new mortgage. But the waiting periods are often much less than most people expect. Check out Table 14-1 to understand the various waiting periods. TABLE 14-1 Required Wait Times before Applying for a New Mortgage Program ForeclosureBankruptcy Short Sale Conventional7 years from completionChapter 7: 4 years from discharge/dismissal Chapter 13: 2 years from discharge/4 years from dismissal 4 years from completion FHA 3 years from completion date Chapter 7: 2 years from discharge Chapter 13: 1 year of payment period must have elapsed with satisfactory payment performance and permission from the court No waiting period if * Borrower made all mortgage/installment payments within the month due for 12 months before the short sale, and * Made all mortgage/installment payments within the month due for the 12-month period before the date of the loan application for the new mortgage 3 years of waiting from completion date required if borrower was in default at time of sale (continued)Griswold, R. S., Tyson, E., & Tyson, E. (2017). Mortgage management for dummies. Retrieved from http://ebookcentral.proquest.com Created from apus on 2020-05-21 07:43:19.

228 PART 5 The Part of Tens Understand the Realities of Investing in Foreclosed Property You may be considering purchasing a property that’s in some stage of foreclosure.

Although earning handsome returns on investing in foreclosed property is an option, make absolutely sure that you know what you’re getting into. Doing so isn’t as easy as some real estate investing cheerleaders may lead you\ to think.

Often, property that ends up in foreclosure has physical problems. So if you rush to buy without thoroughly inspecting a property inside and out, you could end up with more trouble and costs than you expected.

Although a proven way for savvy real estate entrepreneurs to build their empire, investing in foreclosures is for sophisticated, experienced investors only. Finding and buying a good property at an attractive price (including the realistic or actual costs for repairs, renovations, upgrades, plus holding and marketing costs) takes a lot of homework and patience. See the latest edition of our book Real Estate Investing For Dummies (Wiley) for more details. ProgramForeclosureBankruptcy Short Sale VA2 years from foreclosure date Chapter 7: 2 years from discharge Chapter 13: 1 year of payment period must have elapsed with satisfactory payment performance and permission from the court 2 years from completion USDA 3 years from completionChapter 7: 3 years from discharge Chapter 13: 1 year of payment period must have elapsed with satisfactory payment performance and permission from the court No waiting period if * Borrower made all mortgage/installment payments within the month due for 12 months before the short sale, and * Made all mortgage/installment payments within the month due for the 12-month period before the date of the loan application for the new mortgage TABLE 14-1 (continued) Griswold, R. S., Tyson, E., & Tyson, E. (2017). Mortgage management for dummies. Retrieved from http://ebookcentral.proquest.com Created from apus on 2020-05-21 07:43:19.