Foreclosure is a scary word—it is the dreaded “F-word” of real estate; the end of the end. A foreclosure not only kicks you out of your home, but also lessens that chance you will be able to buy a new one anytime soon. A foreclosure stays on your credit report for many, many years and will effect you when opening all kinds of lines of credit. The adjustments of many sub-prime borrower’s mortgage payments have increased the rate of foreclosure, driven neighborhood home prices down further, and effectively barred a significant chunk of Buyers out of the market for the indefinite future. But, what does all of this really mean? How does it effect the typical home buyer and seller in New Hampshire?
First, let’s go over some definitions. Many people ask me what “sub-prime” is (in English and without jargon). Simply put, it is a type of loan that is considered high-risk because the borrower could not qualify for a typical, “vanilla” loan that requires excellent credit, a full-time job for at least two consecutive years with w-2 forms and income tax returns to verify that the borrower can afford the monthly mortgage payments AND their other accumulated debt, and in most cases, a down payment of at least 5%, although there are still 100% financing options available to those that qualify. These types of loans are typically referred to as “conventional, full-documentation” loans. A sub-prime loan is for those who can’t meet the criteria of a full-doc, conventional, “my parents would be so proud” loan.
Let’s delve a bit further. Borrowers are broken down into categories by lenders, and sub-prime borrowers have their own callsifications too. For example, I am considered an Alt-A borrower, the best kind of sub-prime borrower. I can’t qualify for a full-doc loan because I am self-employed and after deductions, I make too little on paper. So, I am somewhat on the cusp of the sub-prime lending world. I am not as high a risk to a lender as many others because I do have excellent credit, little debt, and steady employment. So, they allow me to tell them what I make each year, and they don’t verify it—they only check to make sure my employment is legit and long-term. Because I am more of a risk to them, I receive a higher interest rate than if I were able to go full-doc and they could verify my income and debt load. There are lower, riskier classifications too known as BC borrowers and, as a result, BC lenders arrived to provide these riskiest of Buyers with loan options generally at high rates with teaser introductory payments. So, in a booming real estate market with double-digit appreciation, many lenders convinced sub-prime borrowers to elect loans offering adjustable rates that were “fixed” (or, stayed at the same rate) for a certain number of years; in many cases only 2 years. Often, these were “interest-only” loans that did not effect the total loan obligation at all. If you bought a home for $200,000 and elected to go with an interest-only payment plan, your balance of $200,000 will never go down UNLESS you make an additional payment each month towards the principal (or loan amount). Borrowers felt confident that they could refinance before their rate was due to adjust to a much higher level. Theoretically, this made sense given the market conditions at that time. But, real estate, like the stock-market, is volatile, and in 2006 we entered the begining of what appears to be a long-term housing slump, accelerated by a high rate of foreclosures which are still on the rise and expected to increase expotentially in the coming year(s). Suddenly, houses were not and are not worth what Buyers paid for them even six months ago. Rates began to adjust, and home-owners were unable to refinance because their homes were worth less than what they owed and their borrowing capabilities were at the same level or worse than when they first purchased. Subprime lenders came under attack, and many closed their doors, leaving even less options for subprime borrowers to refinance. This caused even more foreclosures to happen, further driving down prices, creating a whirpool effect.
So, what can the average person do to stop a foreclosure? First, don’t wait until you are several mortgage payments behind to get help. Mortgage companies have entire departments, known as “loss mitigation”, available to help you out of this mess. You have to specifically ask for that department—simply speaking to a customer service representative is not going to get you very far. There are many ways to negotiate with your mortgage company: you can ask them for a lower rate, more time to catch up on payments, lower payments, etc. Be very wary of companies that offer to do this for you for a fee, or “buy your house for cash”—some of them are scams, others are not in your best interest.
If you just want to get out of the mess before you lose the house, in many cases the best way to do so is through a “short sale”. It is amazing to me that so many Sellers (and real estate agents) have never heard of this method before. The premise is simple: the bank allows you to sell you home at a loss (for less than what you owe) and they either 1) provide you with a no-interet note on the difference between the sale price and what you owe, or 2) 1099 you for the difference. In other words, they will report the difference to the IRS as income you made, and you will pay taxes on that difference. The benefit to the home-seller is that he or she is actually able to sell their home in today’s market and avoid the stain of foreclosure on their credit report for many years to come. Best of all, this method STOPS the foreclousure process in most cases. The catch? You have to show “proof of hardship” to the bank/mortgage holder. In most cases, this is also easy to do. Illness, loss of job, divorce, etc are all qualifying factors. Simply stating that you can no longer afford to make your mortgage payments and will lose your home may be enough. It varies by lender, but it costs you nothing to try.
At Assist2Sell Buyers & Sellers Realty, we have handled many “short sale” transactions and have helped numerous homeowners avoid foreclosure. We can walk you through the process and answer any questions you may have, as well as communicate directly with your lender of your behalf and handle the entire process from start to finish. Give us a call (603-883-0004 ext 26) or send us an email. We can also direct you to honest, quality lenders that may be able to help you refinance into a fixed rate if selling is not an option at the time.