Well as the ink on my last blog dries on the virtual page, I got this note and article from my friend Carl Reuter:
I wanted to thank you. I was about to default on my loan when I found out how underwater I was on my place and you were the one coaching me not to miss payments and to look at other options. That caused me to do a lot of research and to go up to bat with my lender and get a serious principle reduction and I managed to get refinanced through another lender. I ended up writing a few short articles on the process in hopes it may help others to get out from under similar debts.
Thanks again, Carl
I share the following in hopes it may help fellow homeowners in crisis.
Myself, along with many others in America are “upside down” or “underwater” on their homes. I found I’d be lucky to get half of what I’d paid for it and I found the bank wouldn’t give me a re-finance to get out from under my 5 year fixed interest only loan. With the economic slowdown my income had decreased dramatically as well. I started to research my options as it didn’t make sense to keep paying for a home I owed $450k on that was worth less than $300k.
A little research taught me that 95% of the folks that go to their mortgage company for a “loan modification” end up defaulting on the loan. If one gets behind in payments the bank is happy to add all those costs onto the back end of the loan and may lower the payment amount and possibly reduce the interest rate but it will cost you and they will not forgive any of the principle. You end up with an even bigger loan! The common misconception is that the lender won’t even talk over options unless you’re already behind in payments. At that point you are faced with foreclosure, which wrecks your credit for 7-10 years or you could “short sale” the home for less than fair market value which would only ding your credit for 2 years. I found the option by not defaulting. I Googled the topic and was able to untangle myths from facts and discovered the “Short payoff re-fi”, also called a “short re-fi” or “short payoff”.
If you qualify, you can negotiate your loan down and still keep your house. Here’s how it works; the homeowner secures a loan elsewhere, essentially a re-fi, but for slightly less than the current market value of the home and they or a third party loan mod specialist presents that offer to their original lender and convinces that bank to accept a lesser payoff, making it clear that the borrower will have to short sale the home or default on the loan if the offer is refused due to financial hardship. The short payoff re-fi means a lesser loss for the bank since the home refinances for about the price of the future short sale and eliminates the costs of foreclosure. As more banks like BofA and Citibank, are seeing the merits of these types of payoff, they are allowing it. You may find a list of banks online. I’ve been dealing with Citibank but and found some of the folks in their short sale department didn’t have a clue about the new short refi program. I went to my mortgage broker and had to educate him as well. Besides being at a lot better interest rate, my monthly payments will drop by over a grand. The whole process took 6-8 weeks. Citibank got a “broker price opinion” of the property value, their appraisal, and negotiated my payoff based on that value.
Before you get too excited here’s the catch; you have to be able to qualify for a FHA loan which is the only one approved for short payoffs, still have good credit, no missed payments, only one loan on the property and prove some financial hardship. It also helps if the original loan is owned by the bank rather than a third party investor. I believe that is called a portfolio loan and it simplifies the process because the bank doesn’t have to get approval from investors.
I originally Googled for “short payoff refi” and found links to some companies that will do all the legwork for around $3000. It’s illegal in California for them to take any money from you till escrow closes so they basically work for free, hoping all the pieces will fit together and get paid at the end. This unfortunately means they may not work as hard on these types of loans and in my case I got discouraged at the slow responses I got and decided to do the legwork myself. Its taken a lot of phone calls and internet research to get the facts straight. I can see why more people don’t know about these options.
None of us signed up for home loans thinking we would one day face losing our homes or be forced to renegotiate the amount we owed just to keep the home. For many of us offering the bank less is the only option and before we shed a tear over their loss, go see Michael Moore’s newest movie, Capitalism- A Love Story. I am no expert on any of this so please don’t seek me out for advice. I encourage you to do your own research, tell everyone you know that’s in this situation and be persistent. Go to your mortgage broker and educate him or her, get the new loan, pay your old loan off for what the house is really worth and don’t forget to get your taxes reassessed for the new value of the home. Good luck.
Carl Reuter is a local renewable energy contractor and long time resident of Santa Cruz that loves living here even though it’s a costly place to call home.