What Happens When I Stop Paying My Mortgage?

An explanation of the process to expect when you stop paying your mortgage, including information about Trustee Sales in Arizona.

How Soon After a Short Sale Can I Buy a Home Again?

A recent report was released by Scott Modeer, loan officer for Arizona Bank & Trust regarding the timelines involved in purchasing a home after going through financial hardship.  The information contained in this report is obviously a snapshot of the market now and may change in the future depending on what our government decides.

If you’ve experienced a foreclosure, short sale, or bankruptcy, the following information may help you determine when you might be able to qualify for a new mortgage so you can be a home owner again.

This is a general guide, and the answers vary depending on the type of program you choose.

FHA Loans

  • Foreclosure: 3 years.
  • Deed in Lieu of Foreclosure: 3 years. (Deed in Lieu is foreclosure.)
  • Short Sale:  3 years (in some cases, if you weren’t delinquent on the original mortgage, this may be waived.)
  • Chapter 7 Bankruptcy:  2 years.
  • Chapter 13 Bankruptcy: 1 year.

(Editorial:  Isn’t it counterintuitive to think that if you simply blow off your debts and file bankruptcy that someone would be more willing to lend to you again earlier than if you do the right thing?  Gross.)

VA Loans

  • Foreclosure: 2 years.
  • Deed in Lieu of Foreclosure: 2 years.
  • Short Sale: 2 years.
  • Chapter 7 Bankruptcy: 2 years.
  • Chapter 13 Bankruptcy: 1 year.

USDA Rural Housing Loans

  • Foreclosure: 2 years.
  • Deed in Lieu of Foreclosure: 2 years.
  • Short Sale: 2 years.
  • Chapter 7 Bankruptcy: 2 years.
  • Chapter 13 Bankruptcy: 1 year.

Fannie Mae/Freddie Mac Conventional Conforming

(Editorial:  Notice how the government programs are convoluted with ridiculous if/then conditions.  They never make any of this simple.)

  • Foreclosure: 7 years.
  • Deed in Lieu of Foreclosure:
    2 years if financing ≤ 80% of the new property’s value; 4 years if financing 81-90% of the new property’s value; 7 years if financing > 90% of the new property’s value.
  • Short Sale:
    2 years if financing ≤ 80% of the new property’s value; 4 years if financing 81-90% of the new property’s value; 7 years if financing > 90% of the new property’s value.
  • Chapter 7 Bankruptcy: 4 years.
  • Chapter 13 Bankruptcy: 2 years.

Jumbo Loans

  • Foreclosure: 7 years.
  • Deed in Lieu of Foreclosure: 7 years.
  • Short Sale: 7 years.
  • Chapter 7 Bankruptcy: 7 years.
  • Chapter 13 Bankruptcy: 7 years.

 

 

Short Sale Cash Contributions at Closing

On many short sales, there’s a point at which the bank will tell us that the seller is required to come to the table with cash or a promise to sign a note for a certain amount of money.

In a specific example, a home owner has been told that they are on the verge of an approval, but until they either pay $3,500.00 cash or promise to repay $7,000 in cash over 120 months (that’s 10 years,) the approval will not be issued.

What’s Presented

The bank will typically represent that the mortgage insurance company who holds a policy on the note is asking Wells Fargo to ensure they get a cash contribution before they’ll pay the claim on the loss from the short sale.  They’ll say that it’s their request.

What’s Really Happening

Sometimes the MI company does request cash, but remember, the bank is in the business of getting your money in their pocket, and they’re not beyond using the ruse of a mortgage insurance company request to ensure you pay them so they recover more of their losses.  So more than likely, the MI company has has NOTHING to do with the request.

The bank is telling the seller that the mortgage company needs a cash contribution, but the mortgage insurance company never told the bank that they needed it.  This is a tactic that negotiators use which I contest is converted to incentives paid to negotiators for bringing in more money for the bank.  The bank is still going to file their claim with the mortgage insurer to recover a vast majority of the losses, but the insurer will be none the wiser that they’ve just squeezed the seller for even more.

How I Handle This

I call their bluff.

As a “private investigator” for short sale approvals (that’s basically what we are,) I hunt down the truth.  A simple friendly phone call to the mortgage insurance company will easily reveal whether or not the bank or servicer is telling the truth.  When we learn that there was never a request, it means we have more information than they’d like, and that’s how one wins negotiations.  The person with the most information wins, every time.  (It’s also assumed that that person has walk-away power.)

What if they actually did make the request?  That’s okay too, because that can also be negotiated away directly with the mortgage insurance company provided the details can be “worked out” as they call it.  If the seller has no money, and no room in their budget for a promissory note payment (in our example $7,000 ÷ 120 months = $58.33 per month) then there can be no contribution.

Now, in light of the situation, $58.33 per month is a small price to pay for the mess that we’re cleaning up, but it’s absolutely unnecessary, and likely to be defaulted on.  The notes are usually proposed at 0% interest, and $58.33 per month to a behemoth of a bank is less than peanuts.  It’s not even peanut dust.

So, if it comes down to blows, and the MI company absolutely won’t budge, then a payment might be wise just to make the problem go away.  You can see that we do everything we can to make sure that this is never the case.

 

Who Can Afford A Down Payment?

As I’m reading through the latest predictions for the upcoming market conditions, I’m taken aback by one of the statements.  In an article written by Jed Kolko, Chief Economist for Trulia.com entitled What the Cyrstal Ball Says about the housing market in 2012, he points out the probability of rental rates increasing, and that it would be a bad thing.

I believe the reason that it is perceived as a bad thing is part of the core of the financial problems we have in this country.  The reasoning is this.  If rental rates increase, and housing prices decrease, then it creates a great environment for buyers, “but only for prospective buyers who can afford the downpayment and qualify for a mortgage.”

I apologize if I’m completely out of my mind, but what kind of buyer do we want?  Do we want to encourage people who cannot afford a home to buy a home?  And what about cash buyers?  There’s no mention of them, and they do exist, in droves.

As a real estate agent who doesn’t believe borrowing money is part of a sound financial plan, I have a hard time with the topic of mortgages.  There are great deals out there, but we shouldn’t be waiting until someone wants to take advantage of a good deal to counsel them about the principles of money…mainly saving, which is what’s required to build up a down payment.  If you haven’t figured that out by now, then you might want to consider re-signing your lease until you do.  If you’re thinking about buying a house, know that a down payment is going to be part of the equation.  Plan your life around a 20% down payment and your long term costs will be much less than if you go with a more “creative” financing plan.

As my financial coach Dave Ramsey always says, “creative usually means too broke to buy a house.”

 

Despite the Fears, It’s Still a Good Time to Buy a Home

The Condition of the Market

Government has a way of destroying all hopes of a successful economic cycle by creating artificial markets through incentives.  The most recent example is the tax credit offered to new home owners.  By giving away tax-payer dollars to buyers who wouldn’t be buyers otherwise, it creates a buying frenzy for the short-term mindset of the ever-so-common paycheck to paycheck wage-earner.

The problem you’ll find in this is that when you create imaginary markets, they become, well, imaginary.  In the Phoenix market, what we’re seeing today is a slow-down in buying.  We’re experiencing an increase in inventory (more homes going on the market than being sold), and that’s part of a widely known law called the Law of Supply and Demand.  When supply increases and demand does not, or even worse, when demand recedes, the prices fall.

Today, we have thousands of homes that are awaiting foreclosure that aren’t even part of that inventory count.  Those homes equate to increased supply.  Buyers are not buying because they’re afraid that once they buy they’ll be upside down in their home.  This may be true, but you must look at one important factor.

Owning Real Estate is a Long Term Prospect

Don’t buy if you aren’t prepared to own for the long haul.  People who get into owning homes before they think about the fact that they may need to be there for a long time aren’t doing themselves any favors.  Part of their monthly mortgage payment goes up in smoke, and the cost to sell in the future means the home needs to appreciate in value enough to cover the fees associated with selling.

This is not an argument against buying.  It is an argument for “buying at the right time.”

Buying at the Right Time

Buying at the right time doesn’t mean that you’re timing the market.  It doesn’t mean you’re looking at the appreciation of real estate as a means to financial independence.  You’re not gambling in this world if you’re truly ready to buy.  Buying at the right time means that you’re ready to buy, whether the market is up, or down.  If you understand the fundamental purpose for home ownership…to build life-long wealth…then you’re ready to buy.  If you have a down payment of at least 20% of the purchase price and you’re going for a loan no longer than 15 years at a fixed rate, then you’re ready to buy.

If you have to use FHA financing, you’re probably not ready to buy.  Sure you may be able to weather the long haul, but without a goal of knocking out your mortgage payment faster than the amortization schedule, then you shouldn’t be buying.

When should I buy?

  • When you resolve to keep the home for life, creating a possibility of future passive income.
  • When you see that your mortgage payment will be less than rent for a comparable property.  (This is a big one.)
  • When you have at least a 20% down payment.
  • When you’ve resolved to take no more than a 15-Year fixed mortgage.
  • When you’ve eliminated all consumer debt.
  • When you have no car payment.
  • When you have no student loan debt.

So what do I mean when I say, “it’s still a good time to buy a home?”  The answer is simple.  If you’re ready to buy, then it’s a good time to buy, because you’ll be holding the property for life.  Not prepared to do that?  Don’t buy.

Should We Stop Paying Our Mortgage?

Benjamins-32

That’s really not a question that I can answer for you.  But, what I can tell you is that there are investors who hold notes on homes who will absolutely refuse to consider you for a short sale unless you’re past due by at least 30 days.

My initial response to this is complete rejection.  Logically, there’s not going to be much of a difference between a seller who has decided not to pay who presents a short sale offer, and a seller who has actually stopped paying who presents the same offer.  The only difference is 30 days.

Most creditors are NOT going to negotiate with someone who is actively paying their bill.  It doesn’t matter if it’s a home mortgage, a credit card, or a personal debt.  Short Sales, however, often have been an exception to this rule, as many investors see the value of cashing out as soon as they can before the values continue to fall, if in fact they fall.  But recently, they’ve started to tighten the reigns.

If I loan you $100.00, and you agree to pay me $10.00/month for 10 months, and you continue to pay, I’m probably not going to be likely to agree to accept a settlement until it’s proven to me that you aren’t going to pay me anymore.  If you pay me $50.00, and then stop paying me, then you approach me a few months later offering an additional $20.00 to settle the entire debt, I may be likely to simply take it and write off the remainder because I’ll want to get what I can when I can, rather than gamble losing it all in the end.

So, I cannot advise you to stop paying your mortgage, because I’m acting on behalf of your best interests, and your best interests include anything and everything that is non-destructive.  When you stop paying, it will affect your credit negatively.  What I can tell you that if you do stop paying, it will show your lender that you’re serious. Of course, if THEY tell you to stop, that’s a different story, and in my opinion, loony on their part.


This Is Going to Hurt

MORNINGSTAR

The economic crisis as we have experienced it thus far has been rather devastating.  I have close friends who are out of work, who have been forced to sell their homes for less than they owe, and who have lost everything they have.  I’m thankful that I’m able to be there to help them through this time.

All but one of the homes that I have sold in the past 2 years has been under water.  I also haven’t placed a buyer in a non-distressed home (short sale or foreclosure) in the same time frame.

Some said that we would be out of this mess by now.  Reality dictates otherwise, and it’s been that way for a while.  We can continue down a road of denial steeped in a bog of irresponsible optimism, or we can open our eyes and see the housing market for what it is.

If you’ll recall, when the market shot through the roof sporting unsustainable prices, it was a direct result of lenders offering incentives (free money) to people who weren’t in a financial position to buy stamps, let alone a house.  When you give money away, you are effectively stealing future business from the marketplace.  In other words, millions of people who would have otherwise not purchased a home until a future date were lured into buying.

The consequences of those purchases resulted in a surplus of homes, and if you know anything about the laws of supply and demand, when there’s too much supply, the price of the product naturally falls because the suppliers (home sellers) are forced to compete against each other, which means lowering their prices to be competitive.

Many economists share the opinion that the free market can take care of itself without intervention.  One example of intervention is minimum wage.  Minimum wage is an example of a price floor.  In other words, we artificially set a price for the supply of labor regardless of the demand.  It’s manipulation of the basic laws of supply and demand, and it doesn’t work.

In the real estate market, we recently went through a period where the government offered $8,000 to anyone who entered into a purchase contract to buy a home before April 30th.  Sound familiar?  By offering money to people who would have otherwise not purchased stamps, let alone a house (see the pattern?) we have yet again borrowed from the future to acquire buyers to buy now.  Naturally, when the dangling carrot is revoked, sales fall off, and the market begins to correct itself.  Unfortunately, like any swing, it will over-correct by swinging past the balancing point, and this will lead yet again to more foreclosures, more short sales, and more unemployment.

It’s 2010.  We are nowhere near recovering.  In fact, we are in the midst of a wave of mortgage rate resets that are going to devastate the 2nd batch of unsuspecting home-owners who had no idea what type of loans they were getting themselves into back in 2005 and later.

So what makes me think there’s a problem?

Option ARM mortgages.  These are miserable products, and there are billions of dollars worth of Option ARMs (Adjustable Rate Mortgages) that are resetting over the next 2 years.  Option ARM mortgages have a very low rate of interest in the beginning, and even allow for the borrower to go negative on their mortgage.  In other words, their payment can be so low that the balance of their loan increases instead of decreases as they may payments.  What a bargain!  In the midst of declining market values, your loan balance is going up.

The risks of an Option ARM place you on a very slippery slope akin to betting your life savings on one company’s stock.  Most borrowers will suddenly be hit with “payment shock” as their payment is reset after a period of time has passed.  Option ARMs can negatively amortize up to 110-125% of the home’s appraised value at the time of purchase.  Once this happens, it caps, and the payments are amortized based on a normal 30 year period, or other similar terms.  Either way, most mortgagors (home owners) suddenly see their payments skyrocket to an unaffordable level.  That means distressed home-owners, which leads to loan mod applications, short sales, and foreclosure (in that order.)

What’s the Solution?

It’s time to get real about your money.  It’s time to get real about the future of our economy.  In the most uncertain economic times that we have known, with speculation that we’re entering the Greater Depression, and being witness to some of the most heinous fiscal decisions our federal government has ever considered, it’s time to get to work.  It’s time to start going without those little luxuries that you’re accustomed to.  Adjust your lifestyle to fit a greater vision of how you see yourself in the future and save your butt off.  Stop spending other people’s money with the justification that “it’s a low rate of interest,” or “it’s only $7.00/month extra,” or “I’ll just pay it off the next time I get paid.”  You may not get paid again, and then where will you be?

Don’t be fooled by what the optimists are saying.  We are not out of this mess yet, and it will be a long while before we ever see what we used to know as “normal” appreciation in the real estate market.  Bottom line?  This is going to hurt, for a while.

The Truth About Loan Modification

stop_foreclosure

When applying for a loan modification, be prepared to disclose your entire financial life to whomever is negotiating your modification.  If you try to do it, you will fail, unless you are persistent, or insane.  Some attorneys require $3000 up front retainers to even begin negotiating with the bank.  There is no guarantee that it will work.

How Can I Qualify?

More than 60% of you do not qualify because a simple modification of your loan will not bring your financial position in line with the bank’s requirements.  So what are those requirements?  The lenders are simply looking at your finances to determine if your mortgage payment exceeds roughly 31% of your net take-home pay.  This is an estimate, and every case is different, but it’s typical.

stop_foreclosureThat means that if you have bad spending habits, or you’re paying bills that should be considered secondary to your mortgage before you pay your mortgage, your lender will call you out on it during the loan modification process.  You may need to prioritize your spending.

So, regardless of your monthly mortgage payment, if it’s less than 31% of your net take-home pay, you will probably be denied.  So don’t waste your time.

Loan modification typically results in a lowered interest rate, 10 years of additional payments on your home, payment deferral, or some other manipulation that will usually not help you anyway.

The real problem is that you owe money on a house that will not recover its value in enough time for you to break even on the future appreciation of your house, and therefore, you’re stuck in that house.  If it comes time to move, you’re still stuck in a situation where you may have to do a Short Sale to sell the home.

The real truth about loan modification is that it’s possible, but it pacifies the homeowner long enough for the bank to continue to make money off of your financial hardship.  Think about it.  The bank wants you to be enslaved to their madness for as long as possible.  At the same time, the banks are out of money and are going bankrupt, so your best option at this point in time may be to do a Short Sale.

The ARMLS logo indicates a property listed by a real estate brokerage other than HomeSmart Real Estate.
All information should be verified by the recipient and none is guaranteed as accurate by ARMLS.

Copyright 2012 Arizona Regional Multiple Listing Service, Inc. All rights reserved.

Data last updated 5/21/12 11:08 AM PDT.

This IDX solution is (c) Diverse Solutions 2012.