What Does a Loan Workout Entail?
- Author Zech Keenan
- Published July 29, 2011
- Word count 925
In today’s volatile real estate market, homeowners struggle to know where to turn for help with their most valuable possession: their home. The economy has left borrowers struggling to make their payments due to reduced or lost incomes, increased expenses, and even increasing monthly mortgage payments. Some have relied on credit cards to survive, others have had to liquidate retirement accounts, and everyone has had to live paycheck to paycheck. There is hope. There are always options available to avoid foreclosure, but whether or not they are affordable depends on your specific situation. All banks offer some type of workout, including reinstatement plans; forbearance plans; repayment plans; traditional loan modifications, and Treasury Department programs. The problem that most borrowers face is getting the bank to offer these to them, and knowing which options are going to be best to pursue.
Get Quick Results
Banks are getting increasingly hard to deal with. Any borrower that has tried to deal with the bank has experienced one or more of the following problems: excessive hold times; conflicting stories; repeated requests for the same documents; denials, and solutions that were more expensive than what the borrower started out with. Knowing what documents are required, knowing what departments to call, and knowing what people to talk to is most of the battle. A well done and complete loan modification packet will help ensure a speedy review process, and good results. Banks have testified to the government that they have trouble getting the necessary documents from the borrower, yet many people have lost their homes even though they complied with every request from the bank. The problem is that everything in the packet needs to be current for the negotiator to be able to work on the file. Knowing what the bank wants before they ask for it is the key to success.
Get Afforbable Payments
Getting approved for a permanent offer is difficult. Most borrowers do not realize it, but they can be denied because of one number being off on their financial statements. Unfortunately, the approval process for a loan modification is just like buying a new home. Underwriters and negotiators have to run waterfall tests and Net Present Value tests that only a few, select borrowers are going to successfully pass. Too much income can leave you with too high of a payment, too little can cause your application to be denied; even expenses need to be itemized a certain way depending on the bank. What borrowers may think is helping them, often ends up hurting them. The loan modification process is a juggling act between getting the payment that you want and getting something offered in the first place. Success in this regard is not always dependent on your financial situation; sometimes how you fill out the financial forms is the bottom line. Knowing what each bank is going to look at, based on their policies and your experience with them can be the difference because almost every bank varies in what they look for.
Stop the Trustee's Sale
Once you stop making payments it is only a matter of time before the bank starts the foreclosure process. Soon after you stop making payments, the bank will hire a trustee company to handle the process. This hired company will be the one to send you a Notice of Default which is a 90 day opportunity to cure the mortgage default. Usually 3 months after the Notice of Default, you will receive a Notice of Trustee’s Sale. This notice is the 20 day warning that your home will be auctioned off. Working with the bank on a modification is often a strategy for postponing sale dates and buying time. Some borrowers have managed to stay in their home, payment free, for years because they knew how to handle it. Unfortunately, it can also be a way to lose the home accidentally. Many borrowers have had their home sell even though they were in review for a modification. Many have lost their home while on a forbearance plan, a repayment plan, or even on the trial period of the Treasury Department's HAMP program. The real problem is that the bank may have the sale on hold, but forget to communicate that to the trustee company. It is important to keep tabs on your sale date and to contact the foreclosure attorneys to confirm that they know not to sell the home. Managing the trustee’s sale for your home is an important part of the loan modification process.
Keeping a Foreclosure From Being Recorded
If you are denied for a loan modification, you will want to short sale the property. Short sales are an agreement with the bank to sell the property for less then you owe and have far less effect on your credit then a non-judicial foreclosure. Managing the modification process well will leave you the opportunity to short sell the property before it goes to auction. The sad reality is that a lot of borrowers do not know when they are going to be denied and do not have enough time to work with the bank to avoid a foreclosure on their record. The home can often be sold within days of a denial letter and sometimes they are even sold before the borrower even knows something is wrong. Depending on the bank, there may be an opportunity to short sale the property if you manage it correctly. Beside the credit implications, a short sale can also keep you in the home for a few more months.
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