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It is the lender's
responsibility to gather enough information to determine
if the default was due to a temporary set back or a
permanent problem that will hinder the borrower's
ability to continue making the mortgage payments in the
future. Borrower's involved with a temporary set back
will have the greatest selection of alternatives
including forbearance, modification and refunding of the
loan. Conversely, a home owner that faces a
permanent loss of income, a long term problem, or a
situation that hinders the borrower from being able to
make the monthly payment may only be able to sell the
home, deed the home over, or face foreclosure. In
addition, it is the lender's responsibility to carefully
search for alternatives, including the determination
whether a relative, family member, employer or previous
owner may step up and resolve the delinquency.
Before deciding upon a course of
action, the lender will complete a detailed financial
analysis of the borrower to determine his or her current
income and debt status. The financial analysis may
include but not limited to verification of employment,
credit checks, and requests for personal financial
information such as bank statements, paystubs, and tax
returns.
Furthermore, if the property has
been abandoned by the borrower, the lender will initiate
foreclosure action immediately. Abandonment will
also relinquish the borrower of many alternatives that
he or she may have been eligible for.
The recommendation to foreclose
upon a home is only determined after the lender has
tried to resolve the delinquency through flexible and
adaptive collection techniques. It is the
lender's discretion to offer the borrower any of the
possible alternatives.
Forbearance
Forbearance is an agreement between
the lender and the borrower that reinstates the
delinquent loan through the payment of a lump sum or a
schedule of payments over a period of time. If a
borrower is behind in his or her payment by $2,000, for
example, the lender may allow the borrower to pay the
money back through installment payments over six months.
The lender may decide, on the other hand, to allow
the borrower to pay a reduced monthly payment until the
borrower has an opportunity to get back on his or her
feet and pay any remaining arrearages in one lump sum.
The forbearance may be an oral
agreement or written contract between the lender and the
borrower. Generally these agreements will not
exceed more than 12 months.
Loan Modification
A loan modification is a change in
any of the terms of the original note. This
includes decreasing the interest rate, re-amortizing the
remaining balance, extending the term of the loan, or
other options at the lender's discretion to assist the
borrower through a temporary set back.
Generally a lender will consider a
loan modification when foreclosure is eminent and the
borrower's income has been decreased or unable to make
the mortgage payments, but will be able to keep the loan
current after the loan modification.
Sale of the Home
Selling a home is an alternative
for borrowers that are unable to reinstate the loan and
face eminent foreclosure. This option allows a
home owner to try to salvage his or her credit, pay off
the loan, and retain any remaining equity in the home.
VA will permit a veteran to sell
the home when the proceeds from the sale are not
sufficient to pay off the VA loan due to a decrease in
property value or if the home has not appreciated enough
to cover the repayment of the delinquency, sales
commissions, and normal closing costs. In this
type of situation, VA will consider a "compromise claim"
in which it will pay the lender the difference between
the net sales proceeds and the mortgage balance.
It is important to note that the borrower may be
required to sign a promissory note to repay VA for a
part or all of the compromise claim.
Deed-in-Lieu of Foreclosure
(DIL)
A deed-in-lieu of foreclosure is a
voluntary conveyance of title to VA. Generally
this is a last ditch effort by the borrower to avoid the
negative consequences of foreclosure. In return
for the voluntary conveyance to VA, the borrower is
often released of any personal responsibility for the
mortgage.
In order to qualify for a DIL,
there must not be a second mortgage or junior liens on
the property. The property must have a value of at
least 75% of the original value. Properties with
values in excess of the amount owed against the home (to
include normal closing costs) should consider selling
the property before voluntarily conveying the home to
VA.
Refunding
Refunding is the process where VA
agrees to buy a loan in default from a lender and take
over the servicing of the mortgage payments.
Though it is not the right of the borrower to demand
that VA refunds the loan, refunding allows qualifying
home buyers to avoid foreclosure when the lender is
unwilling or unable to assist the borrower with
foreclosure alternatives.
It is important to note that VA
considers any loan that is in default for six or more
payments to be an insoluble default. An insoluble
default will result in foreclosure action against the
borrower. The borrower may seek relief through
forbearance if he or she can prove that the default was
temporary and has been resolved.
Should foreclosure proceeding
occur, the borrower may still reinstate the loan by
procuring sufficient funds to bring the loan current.
In Arizona, this means that the borrower has until the
last minute prior to the Trustee's Sale to reinstate the
loan.
Timeline
If a borrower is later than 16 days
with the mortgage payment from the day it is due, the
lender is required to send the borrower a notice in
writing. The notice must be mailed by the 20th day
and clearly state how much the borrower owes (to include
late fees). During this time the lender will try
to contact the home owner by phone. If telephone
contact is not made within 30 days from the delinquency,
the lender is required to send a second letter that
should 1) state the loan is in default, 2) emphasize the
seriousness of the situation and the importance of
paying the delinquency, 3) show the borrower how much is
owed (to include late fees), and 4) advise the borrower
on how to contact the lender to arrange for payment.
Should the borrower submit a
partial payment in lieu of the full amount to reinstate
the loan, the partial payment may be returned if:
-
the property is investment
property and the borrower keeps the rental income
instead of turning it over to the lender
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the payment is less than one
full monthly payment (including principal, interest,
taxes, insurance and any applicable late fees)
-
the payment is less than 50% of
the total amount due
-
the payment is less than agreed
to in a written repayment plan
-
the payment is in the form of a
personal check and the borrower has been advised
that payment must be in the form of certified funds
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the delinquency is 6 months or
more
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foreclosure has been initiated
It is the responsibility of the
lender to return the payment within 10 calendar days and
include a letter explaining the reasons for the returned
payment.
Negotiating With Your Lender
As a borrower prepares to speak
with his or her lender, there are several key areas to
focus on before any interviews begin. As stated
before, VA relies on the lender to determine a
borrower's eligibility to include the type of hardship,
the status of the property, and an evaluation of the
borrower's financial situation. Successful
negotiations is determined by preparation and good
communication.
When preparing for the interview,
ask yourself the following:
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Why did I default on the loan?
Is it a result of just not making the payment or
have I suffered a verifiable loss of income.
Lenders will listen if you have had a verifiable and
temporary setback in income. The key is being
able to support your reasons for being late.
If the reasons are due to temporary layoffs for
example, send the lender a letter from your employer
stating that you have been laid off. If you
don't have a reason, you may limit your options.
-
Can I cut back on my expenses
anywhere? After looking at your income, the
lender will analyze your expenses. Do you
really need cable if you face the threat of losing
your house?
-
Can I sell an asset to
compensate for the deficiency or loss of income?
Do you have any assets that you are forced to make
payments on? Would selling the asset decrease
your monthly expenses and/or generate sufficient
cash to apply towards the loan? In some cases
a borrower may be able to sell a car, for example,
to reduce the monthly expenses by eliminating the
car loan. Also, any profits from the sale of
the asset could be used to bring the loan current.
-
Do I know anyone that could
loan me the money to get back on my feet? Do I
have any family members, relatives, or other sources
that could loan me the money. Though most
people are ashamed to ask, asking a family member,
friend or relative may be the only hope of saving
the family home.
-
Is it worth the effort to save
the home? Would it be easier to sell and start
over? In some cases a borrower may not be able
to handle the burden and stress of keeping the
house.
-
Should I file for bankruptcy?
When facing a financial crisis, a borrower will
often look towards bankruptcy as an option to
alleviate the problems. Before making a
decision, determine how bankruptcy will affect your
ability to keep the home.
-
If I were the lender, would I
justify the cause based upon the borrower's
situation? Though this is one of the most
difficult questions to ask, be realistic. If
you loaned someone $100,000 dollars, would you
believe his or her excuse for being late? If
not, you might want to reconsider your excuses.
Remember that lenders prefer to hear about temporary
setbacks versus permanent situations.
The lender will do a detailed
analysis of the borrower's financial situation and
scrutinize the reasons for the default A borrower
should compile the applicable paperwork including
letters from employers show a decrease income, bills and
receipts justifying an increase in expenses, and prepare
to answer the questions about the reasons for the
default. Knowing your situation allows you to talk
effectively with your lender.
The second key to successful
negotiations with a lender lies in good communication.
Good communication is achieved by quick action,
immediate responses, and positive cooperation. If
a home owner knows that he or she is going to be late,
the borrower should call the lender. Ignoring
letters and phone calls from the lender actually
increases the likelihood that the home owner will lose
the home.
Once the home owner has begun a
dialogue with the lender, it is important that the
borrower responds to the lender's requests. The
home owner should create a diary of events and log every
call, letter, and meeting. He or she should
include the date, time, who called, the telephone number
and extension of that individual, and detail what was
spoken. The home owner should keep copies of every
letter sent to and received by the lender.
Furthermore, the borrower should emphasize his or her
desire to work out a solution to the default each and
every time the lender calls. If the cause for the
default has been resolved or will be resolved, the
borrower should assure the lender that his or her
problems are behind them and he or she is trying to get
back on their feet. The lender will generally be
more lenient and willing to work with a home owner if
the problem(s) are in the past.
Should the lender fail to follow VA
procedures or appear to be uncooperative, the borrower
has the right to request VA to assist in finding
alternatives to foreclosure. As mentioned before,
this may include refunding and could also lead to
forbearance or loan modification. Though VA may
look skeptically upon a borrower requesting VA
intervention, citing a lender's failure to use proper
procedure (such as the notification requirements
explained above or return of payments) will undoubtedly
assist the borrower's case. Furthermore, should VA
intervene with the loss mitigation process, the lender
is required to delay the foreclosure proceedings until a
solution can be found.
Finally, the borrower should
remember to keep a positive attitude. Threats,
belligerent dialogue, and an unwillingness to cooperate
does not prove to the lender that the borrower is
serious about working out a solution. In addition,
the borrower shouldn't make promises that he or she
cannot keep. Though it may seem like an easy way
to stall a foreclosure, the borrower may end up with a
higher payment, owe more money than originally
delinquent, destroy his or her credit, and may lose the
house in the process.
Foreclosure is an expensive process
for both the home owner and the lender. However
lenders realize that foreclosure is an effective means
to demand payment from a home owner. A borrower
must be prepared and ready to face the consequences of
his or her situation. Knowing his or her options
and expectations of the lender are crucial to
successfully avoiding foreclosure.
However, there is free help and
assistance for home owner facing the possibility of
foreclosure. If you would like to talk with
someone about your situation,
click here.
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