Loss Mitigation Alternatives (Or When is a Short Sale not Appropriate)
With historically high rates of default on home mortgages lenders are facing many more foreclosures than they have in the past. This allows for short sale investors and pre-foreclosure specialists to thrive in the current market. However, not everyone who defaults on a mortgage should be considered a candidate for a short sale.
A short sale is only one of six loss mitigation options, and playing the pre-foreclosure game successfully requires a working understanding of the other five. In this article we will look more closely at all of the options available to a homeowner with a defaulted mortgage so that you will be able to present a balanced picture to your client and help them make the decisions that are in their best interest.
Does working with sellers in pre-foreclosure mean you have to be a loss mitigation expert? No, but it does mean you should be familiar with the options available to your client and be able to refer them to a different specialist whenever appropriate.
The purpose of loss mitigation options is to provide an alternative to foreclosure for homeowners who have had difficulty keeping up with their payments but who may still be willing and able to stay in their homes. Generally speaking, a lender is not likely to offer loss mitigation options to the owner of an investment property. And a short sale is usually the last choice on the lender’s list of options, only slightly better than an actual foreclosure.
The first loss mitigation option, in order of the lender’s preference, is a repayment plan. This is where the homeowner catches up the payments and brings the loan current, perhaps by making higher than normal payments for a set period of time. The lender experiences no loss this way. The second option is a loan modification, where the borrower and the lender agree to new loan terms that are acceptable to both, perhaps with a lower interest rate but larger balance.
Third is a forbearance, which is where the lender allows the borrower to go for a specific amount of time without making payments, perhaps adding the back payment amount onto the balance of the loan. Those three options all apply to a homeowner who is able (eventually) to pay for the house.
For the homeowner who doesn’t have the means to stay in the house, the lender’s preferred option is an assumption, which is where somebody else who qualifies assumes the loan and resumes payments. Next is a deed in lieu of foreclosure, which is where a lender agrees not to foreclose but rather accepts the property by quit claim deed, which will protect the borrower’s credit somewhat. And finally, the last option considered by lenders before foreclosing is a short sale.
Understand that making use of any of these alternatives requires strict qualifying by the lender. All loss mitigation alternatives require there to be a legitimate hardship on the part of the borrower. A repayment plan, loan modification, or forbearance will require demonstration of the borrower’s ability to pay, an assumption will require the assumer to qualify for the loan, and a deed in lieu or a short sale will require documentation of the borrower’s inability to pay.
As a pre-foreclosure investor, only after you have informed your client of and eliminated all other options can you confidently proceed with negotiating a short sale.