Was your house confiscated? Have you been working with the mortgage company for months to try and get a loan modification that could solve the problem? Do mortgage companies seem to be dragging their feet, asking you for the same paperwork over and over and yet you seem no closer to actually accomplishing something? Now there seems to be a sudden notice of a Trustee/Sheriff sale. you panic. There are options that will save your home and allow you to continue working to get loan modifications. That option is chapter 13 bankruptcy. Chapter 13 will stop the sale now and give you a repayment plan that if you settle will put you right where you need to be with your mortgage (your mortgage will be smooth). A chapter 13 submission doesn’t mean that loan modification is impossible, but if you’ve already started, you may have to start again. But this time, there will be no threat of losing your home. If on the other hand, you give up the house, there are still options you have to pursue when you are in bankruptcy.
After you file a case and the sale is terminated, you can then restart the loan modification process by requesting a loss mitigation package from the lender or service provider. When you do this, they usually send a “waterfall” package. This is an application that will check eligibility for HAMP loan modifications, in-house modifications, eligibility for shortsale, and eligibility for deed in lieu of foreclosure, and possibly eligibility for short payments. This post will explore all of those options and additional loan mod options besides HAMP.
Once you receive a loss mitigation package, it is important to ensure that you have all the requested documents together before sending them to the mortgage company or service provider. They will generally ask you for 2-3 months bank statements, a signed and dated Dodd-Frank Certification, a copy of your most recent payslip for 2 pay periods of up to 3 months or more, a signed and dated 4506-T form with your phone number and properly filled out, a copy of your last two years’ taxes, and a letter of distress. Some of them are self-explanatory, some of them may be unfamiliar. The Dodd-Frank certification just needs to be signed and dated, no big deal. Form 4506-T must be completed completely or your loss mitigation application process will be delayed by months. You really need to check with your attorney to make sure that you file it properly. Generally, you need to fill out the top completely, select the type of transcript you want them to send to the mortgage company, you need to include the year you want them to send, generally 3 years and they generally want the format date to be 31/12/2012, 31/ 12/2013, 12/31/2014 for example. You then need to sign it, date it, and put your phone number next to the signature line. As for the adversity letter, it should indicate why you started to fall behind on your mortgage, and when or why the adversity ended or has ended so that you will be able to make payments in the future.
Part of the application process also requires you to fill in your household income and expenses. A common mistake people make is underreporting income/overreporting expenses. Keep in mind that part of the process, if you want to change a loan, is that the review of the modification must go through underwriting. That means that they will check to see if you can afford the new payments they can offer. If you can’t show that you can make payments, you won’t be offered a loan modification.
The different types of loan modifications that banks can or will offer will depend on whether they have offered you loan modifications in the past. HAMP stands for Affordable Home Modification Program. This is a program created after the subprime mortgage crisis. Generally you only receive one HAMP loan modification offer per loan. However, it’s not a hard and fast rule, and I’ve seen HAMP modifications offered more than once per loan. HAMP modifications can reduce the principal balance, they can reduce the interest rate, they can re-amortize the loan over a longer period of time (stretching your loan), or they can do some of these things to help you get a lower-paying loan. Offers that include a principal deduction will usually have certain benchmarks you must meet to ensure that the principal is actually forgiven. If you fail to meet this benchmark, the pardoned principal will return. Generally, you need to make sure that the loan is in good condition on the first, second, and third anniversary of the effective date of the trial period. The principal amount less generally will not be treated as taxable income. Talk to your tax attorney or accountant for more information on this. Another type of loan modification that your mortgage lender may provide is an internal modification. For the in-house loan mod, the lender is not bound by HAMP requirements. They can also offer this even if they determine that you are not eligible for HAMP. The result may not be that great but it should still be better than what you currently have. Unfortunately, you may find that the modification offer is not to your liking. Maybe it doesn’t reduce the interest rate much, or maybe it adds 10 years to your loan and you don’t feel like it fits. As long as you continue your chapter 13 bankruptcy, you will settle it with your original loan intact on initial terms and on time as per the initial repayment schedule. (There are a few small caveats to this that you should check with your attorney.)
Another option if the modification won’t work is to ask for a short reward. Basically, you’re asking the lender/service to pay off the remaining balance for something less than what’s owed. I’ve seen short yields of between 10% and 33% so some great options are out there if your lender determines that you qualify. You will need to speak with your tax attorney/accountant to find out if you should pay income tax on forgiven debt.
Short Sale, Deed of Substitution – What if you decide that you don’t really want the property anymore? In this case, you have several options. Giving up assets in bankruptcy is not enough. If you simply turn over the property in bankruptcy and then the mortgage lender sits on their toes and doesn’t move to complete the foreclosure process, you will be stuck with liability on the property if anyone is injured or for housing code violations. To avoid this, you can try to do a short sale. Short sales are potentially available where you are underwater at home. If there is only one lien on the property, you are more likely to hit a short sale. The more liens there are, the more parties will have to be satisfied with the sale offer. The same applies to a replacement deed. Deed of replacement, short for deed of replacement foreclosure is where you sign the property to the mortgage lender in exchange for them not taking over the property. This can potentially save you a lot of bank money and be beneficial for you to get rid of any obligations of continuing home ownership.
If this sounds like you, know that there is help out there. Contact a local bankruptcy attorney with experience in this field to assist you.
Good luck,