Delinquent borrowers facing foreclosure are learning that they can stay in their homes for years, as long as they're willing to put up a fight.
Among the tactics: Challenging the bank's actions, waiting to file paperwork right up until the deadline, requesting the lender dig up original paperwork or, in some extreme cases, declaring bankruptcy.
Nationwide, the average time it takes to process a foreclosure — from the first missed payment to the final foreclosure auction — has climbed to 674 days from 253 days just four years ago, according to LPS Applied Analytics.
And while some borrowers are looking for ways to make good with lenders and get their homes back, many aren't paying a dime. Nearly 40% of homeowners in default have not made a payment in at least two years, according to LPS.
In some of the more extreme cases, borrowers will file for bankruptcy in order to block a foreclosure. In these instances, courts order creditors to cease their collection activities immediately. Home auctions can be postponed as the bankruptcy plays out, which can take months.
The ensuing delays are further harming the housing market. People who stay in homes undergoing foreclosure for years often don't maintain the properties, causing blight and lowering property values in the surrounding neighborhoods.
Given the number of loans either seriously delinquent or in the process of foreclosure at the beginning of the year, the number of completed foreclosure sales in 2011 is almost absurdly low, reflecting the complete screw-up of the mortgage servicing industry, and the resulting dramatic slowdown in foreclosure resolutions.
As of the end of October, 2011 LPS estimated that there were 1.759 million seriously delinquent loans with the average number of days delinquent at 388 (compared to 192 days in January 2008), and there were 2.210 million loans in the foreclosure process that had been on average delinquent for 631 days.
There are many different ways to secure funds for foreclosure investing. Many of the top investors have their own money allotments for foreclosures, or a tight relationship with a bank who views them as a small business. While this is great for the seasoned investors, where does that leave the new investors in the market? Let's take a look at some popular funding options for buying foreclosed homes.
Buyer
Many times, when investing in foreclosures, you do not even need to have a bank loan, you just need to be able to identify a suitable buyer for the property that is willing to pay the right price. This makes it easy to find and buy foreclosure investment properties if you can find a buyer beforehand. Remember to have a contract and pre-approval for the buyer's bank loan so, if they change their mind after the bid has ended, the full amount of the property does not come back to rest on your shoulders.
Having a buyer lined up will take a lot of stress off of you and will make the process run a little smoother than normal. Banks will not look for as much information from you in order to get funding approved and the banks will see another full-time buyer, which puts them at ease.
Banks
If you don't have a buyer lined up, or you plan on buying the foreclosure for your own benefit, possibly for a rental property, then you will need to secure funding yourself from a bank if necessary. It is important to find the right bank and is usually a good idea to work with a foreclosure real estate broker for the first time or two in order to feel your way through the banking market.
Once you have flipped a few foreclosures or are actively paying on one rental property when you decide to purchase another, it will be a good idea to know a few people on the inside of the foreclosure financing department at the bank. It is also a good idea to buy down as much of the interest rate as possible or start out by choosing a bank with an extremely low interest rate to begin with. Having the low rate will help your payments and keep you in check with your budget.
Grants
Believe it or not, there are government grants out there that help investors buy foreclosed homes. The reason these grants are out there is because the government feels that a foreclosed home that has been flipped often provides affordable, quality rental housing for low-income families.
There is a specific program called the Rental Rehab program which is a forgiveness loan, which means the program finances up to 50% of the total foreclosure rehab costs. While this does not secure the full amount for the foreclosure, it is just another way to keep your budget in check when looking for available financing.
There are plenty of ways to secure funding for foreclosed homes. The key is being diligent in your search and seeking out the best deal. While having a buyer pre-approved is a great thing, it also helps to have a banking mortgage finance guru on your side as well. If all else fails, government grants are a great way to keep investing if you don't mind the paperwork on the front end.
The number of foreclosures climbed in October, as mortgage lenders started to work through the paperwork problems that had delayed new filings for much of the last year.
Foreclosure filings were reported on 230,678 properties nationwide in October, a 7% increase from September, according to RealtyTrac, an online marketplace for foreclosed properties. Despite the increase, filings were still 31% below year-earlier levels.
RealtyTrac said one in every 563 U.S. homes had either a default notice, a scheduled auction or a bank repossession filing during the month.
The best hopes for stopping foreclosures is an improvement in the overall economy, especially the battered real estate and labor markets. But with so many foreclosed homes weighing on the market, and with unemployment still at 9% and consumer confidence low, even mortgage rates near record lows aren't enough to fix the problems caused by the bursting of the housing bubble.
The term "short sales" is used to describe a situation in which a homeowner is at risk of defaulting on their loan, and the lender agrees to sell the property below the original appraisal price in order to avoid foreclosure. Most lenders do not readily agree to short sales, although exceptional circumstances such as a homeowner losing his/her job or the death of a wage-earning spouse may make some of them more open to doing so.
If a property is sold as a short sale, the lender recoups at least a portion of the original loan amount, the homeowner avoids the stress and stigma of foreclosure, and the new homebuyer gets a property below its original appraised price. If a short sale doesn't work, then the property usually goes into foreclosure.
Short sales may be an emerging trend as the rate of foreclosure is rising dramatically across the nation.
The credit of homeowners may be impacted after a short sale, but it all depends on how the lender reports the outcome. Some lenders report a partial loan repayment as full payment of the debt due, which does not adversely impact the credit of the borrowers. Other lenders report the sale as "settled," which adversely and significantly impacts the borrower's credit. The other problem is that the portion of the loan amount forgiven by the lender may actually count as taxable income by the IRS.
In summary, a successful short sale has some potential positive benefits (e.g., homeowners avoid foreclosure, lenders recoup at least a portion of the loan amount, new homebuyers gets a property at below the original appraisal price, etc), but there are also many negative consequences.
Some of these potential negative consequences include: the negative impact on borrower's credit, negative impact on the value of other similar homes in the neighborhood, and that the amount forgiven by the lender may be taxable event.
Homeowners having difficulty making their monthly mortgage payment may benefit from talking to a real estate agent who is experienced in short sales.
There are several differences between a short sale and a foreclosure. Homeowners who find they are having difficulty meeting their monthly mortgage payments should be careful to understand these differences before taking action. Discussing the options with their mortgage company, scheduling a meeting with a real estate consultant, and learning what potential taxable and credit report consequences may be, are all important facets to understand before making a decision. Let's first look at the definition of these terms:
Short Sale – when a lender agrees to accept less than what a homeowner owes on a mortgage. In a short sale the home is listed by the owner and sold.
Foreclosure – when the homeowner stops making monthly mortgage payments and the bank takes legal action against the homeowner and the deed of the home returns to the lender. In a foreclosure, the deed is transferred to the bank in a legal action.
Now that we know the difference, let's take a look at the specifics of the short sale and a foreclosure:
A short sale provides the home owner the opportunity to put the home on the market at or near market value even if more than the market value is owed on the property. When the home is offered for sale, it must be advertised and marketed with verbiage such as "short sale" and "all contracts must be approved by bank." This informs potential buyers that the seller cannot accept any offer without approval from the mortgage holder. In some cases, the bank will wait until several offers have been received before making a decision as to which one, if any, to accept. The reason for this is so the bank can be sure to accept the highest offer, thereby receiving the most money back on their initial investment.
The reason a bank will even consider a short sale is because often times they will retain more of the money owed them as opposed to going through a costly foreclosure. The foreclosure procedure is expensive for banks as they include attorney fees, court fees, realtor fees, and tax expenses. Often it is simply more cost effective for them to accept the short sale.
Homeowners who are considering either of these options should also consult a real estate professional, a tax specialist, and perhaps a tax attorney. There are real estate professionals who specialize in short sales. They can provide additional information, such as the current market value of the home, the potential for it to sell at a specific price, and how long it will take to receive an offer. They will also be able to manage the short sale transaction, assisting the homeowner with forms, communication and anything else required of the bank. In addition, a tax specialist or tax attorney will be able to provide advice on any potential taxable consequences the homeowner may be responsible for in either a short sale or a foreclosure.
When determining what is best for a particular situation, short sale vs foreclosure, consult the professionals, discuss options with the mortgage holder, and understand what it will take to be successful in either case.
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