Fannie Mae announced this week new rules that will require mortgage servicers to act more quickly and consistently in helping troubled home owners avoid foreclosure.
Fannie told servicers they must strive to build a “strong customer service relationship,” better understand why the borrower is missing payments, and educate them on ways to prevent foreclosure.
“We want home owners to be able to understand their options when facing foreclosure, and we want servicers to reach home owners early in the process, communicate frequently and clearly, and help home owners avoid foreclosure,” says Jeff Hayward, senior vice president of Fannie Mae’s national servicing organization.
Also among the revamped guidelines, Fannie told servicers they will be required to contact home owners verbally and in writing within 120 days after a loan first becomes delinquent. They will need to try to complete a loan modification or other option that keeps the borrower in their home or helps the borrower avoid the foreclosure process.
If foreclosure is unavoidable, servicers will need to follow a clear timeline and must begin the foreclosure process once a loan has been delinquent for more than 120 days. Servicers also must make it clear when a property in the foreclosure process will be sold.
(Article source: Realtor.org)
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You can buy a home at a significant discount at a foreclosure auction, but you’ll face a host of challenges. Don’t get burned; be solutions-ready.
If you want to get a good deal at a foreclosure auction, know what you’re buying and how you’ll be expected to pay for it.
Start by understanding the foreclosure auction rules for your area. State and local governments set their own rules for such factors as:
Bidding process
Amount of deposit
Where the auction is held
Whether the home owners can get their properties back after the sale
You can learn about the process in your area by talking to officials at your county tax department or to a REALTOR®.
Although foreclosure auctions follow local rules, there are some universal challenges you’ll face no matter where you shop for foreclosed properties. Here’s how to solve them.
Solutions to 6 common foreclosure auction challenges
1. Challenge: Getting reliable information about foreclosure sales. Many companies charge fees to send you lists of foreclosures that may not be current, or sell expensive foreclosure-buying “systems” that promise to teach you how to make millions in real estate.
Solution: Most foreclosure sales are still announced in local newspapers. And you can get accurate information about buying foreclosures from reliable book publishers:
Foreclosure Investing For Dummies (For Dummies, 2007)
Keys To Buying Foreclosed and Bargain Homes (Barron’s Educational Series, 2008)
2. Challenge: You can’t get inside the property before the auction to inspect it for structural problems and repairs. Many foreclosure auction properties are in bad shape because the owners couldn’t afford the upkeep. And sometimes angry home owners purposely damage the property to punish the foreclosing lender.
Solution: Walk around the home to check its exterior condition. If it’s vacant, look through the windows. Ask the neighbors what they know about the property. If it was a rental, check the inspection records on file with the local government.
You can safely assume there’s something wrong with any house sold at a foreclosure auction, so cover yourself by bidding no more than 70% of the home’s market value.
3. Challenge: You need to figure out the market value of the house to prepare your bid. Some foreclosure auction announcements include information about the size of the original mortgage. That’s not how much the house is worth or even what the owners owe now. If the current owners bought at the top of the market, their mortgage may be more than the home is worth in today’s market and they could owe even more if there’s a second mortgage on the house.
Solution: Commission your real estate agent to do a broker’s price opinion (BPO) on the home you want to bid on. The BPO will show you comparable sales, telling you what similar, nearby homes that weren’t foreclosure sales have recently sold for.
Bid well below those comparable sales to leave yourself room to pay for repairs and unexpected problems. Ask the agency that runs the auction how to find winning bid amounts from recent auctions. Use that information to guide your current bid, too. A look at local tax and assessment records will tell you more about previous and current auction properties, like square footage and lot size.
4. Challenge: You don’t know if there are liens on the home. Some auctions don’t give you clean title to the property, meaning liens from the federal government or other entities may not be removed during the foreclosure auction process. You’d have to pay off those liens if you won the property.
Solution: Focus your efforts on two or three homes in desirable locations. To find out about any liens, pay a real estate attorney to run a title search on each property and issue a commitment to insure the title after purchase. Ask how the policy treats liens filed between the time of the search and the time you close.
A less-expensive option: Hire an independent title search professional called an abstracter or an online company. Both search options should be under $200, title insurance costs vary by state.
5. Challenge: You have to pay cash and pay it quickly. Most auctions require bidders to come up with the full purchase price in cash within 30 days.
Solution: Don’t count on getting a mortgage that fast. Look for other sources of cash that make financial sense for you.
Take out a home equity line of credit or do a cash-out refinance.
Tap retirement accounts, provided it makes sense for you from a tax perspective.
Work with other investors to fund a partnership to invest in foreclosed homes.
6. Challenge: You’re in love with a house that you’re aware is headed to foreclosure, but you’re afraid to bid on it at the foreclosure auction because you know nothing about the process.
Solution #1: Contact the owners and offer to purchase the home as a short sale. That’s where the bank agrees to let the owners sell for less than what they owe on the mortgage.
Solution #2: You may be able to buy the house after the foreclosure sale. Foreclosure sales are run by a government agency (often the sheriff), which collects the money from the highest bidder and gives it to the bank to pay off the mortgage.
Banks will often bid at the sale to make sure someone doesn’t pay less than the house is worth (translation: not giving the bank enough money to satisfy the mortgage).
If the bank is the high bidder, it’ll take title to the house and put it up for sale. Then, buying the home is just like buying any other house. You can buy an owner’s title insurance policy so you know the house is free of liens; you can get a home inspection to check for needed repairs; and you’ll have plenty of time to line up your financing.
A real estate agent can alert you the day the bank puts the home on the market, so you can submit your purchase offer.
Since the bank pays the real estate agent’s fees, you likely won’t pay more than you’d have bid at the foreclosure auction to outbid the bank, and you’ll avoid most of the risks and unknowns of buying at the auction.
More from HouseLogic
How to Assess the Real Cost of a Fixer-Upper House
6 Tips for Buying a Home in Short Sale
Foreclosure Resource Guide
Other web resources
Buying at a Foreclosure Auction: Pros and Cons
Auction Guides: Not so Hot Properties
Marcia Jedd, who covers a range of home and real estate issues, dreams of stumbling upon a foreclosure sale where a vacation lake cabin in northern Minnesota is being sold free and clear at a deep discount. Her bylines include many local and national publications, including FrontDoor.com, HGTVPro.com, Kitchen & Bath Ideas, and Professional Builder.
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Have to sell your home for less than it’s worth? Our seven tips will help you get the best price.
1. Know who you owe
A short sale has to be approved by any company that has a mortgage or lien against your home. That includes your first, second, or even third mortgage lender, your home equity line lender; your homeowners or condominium association; and any contractors who’ve placed a lien on your home. Make a list and start talking to everyone early in the process. Ask what documents they’ll need from you.
2. Pick your short sale team
You’ll need to work with a team of short sale experts, including a real estate agent, real estate attorney, and your accountant. Look for agents and attorneys who advertise themselves as short sale experts. Interview at least three, and listen carefully for signs that they understand the complexities of the short sale process.
Agents should explain how they’ll arrive at a suggested price for your home. Ask them to show you a sample short-sale package or for an example of a prior short-sale success.
3. Get your documents ready
Gather the paperwork your creditors and mortgage lenders asked to see, like your listing agreement and a hardship letter explaining why you need to do a short sale. You’ll also need proof of what you earn and what you owe as well as copies of your federal income tax returns for the past two years.
4. Expect delays
Despite a federal rule saying banks participating in the federal government’s Making Home Affordable loan modification program must respond to short-sale offers within 10 days, it may take weeks or months for your lender to decide whether to allow you to sell your home in a short sale–and even longer if you must negotiate with more than one lender or lienholder.
Your lender and lienholders don’t have to agree to your proposed short sale. They can reject your terms or make a counteroffer, which can create further delays.
5. Anticipate demands
Discuss with your short-sale team how you should respond to common short-sale demands from lenders. For example, are you willing to sign a promissory note agreeing to pay outstanding amounts after the sale is complete?
6. Know the tax implications
Any unpaid amount of your mortgage “forgiven” by your lender through a short sale may be considered income to you under federal tax rules. Ask your attorney or accountant whether you qualify to exclude that amount as income on your tax returns under the Mortgage Forgiveness Debt Relief Act and Debt Cancellation Act. Also ask if you’ll be required to report amounts “forgiven” by other lienholders, if applicable.
7. Consider how the short sale will affect your credit and what you must pay
Ask whether your lender will report the short sale to credit-reporting agencies. Having a portion of your debt forgiven may negatively affect your credit score, but a short sale typically damages your score less than a foreclosure or bankruptcy.
Ask you lawyer whether you’ll be responsible for paying back the lenders’ loss. If the lender says it will forgive any losses on the sale of your home, get that promise in writing.
Other web resources
More on short sales
IRS information on the Mortgage Forgiveness Debt Relief Act and Debt Cancellation
This article includes general information about tax laws and consequences, but isn’t intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice; tax laws may vary by jurisdiction.
G.M. Filisko is an attorney and award-winning writer. A frequent contributor to many national publications including Bankrate.com, REALTOR® Magazine, and the American Bar Association Journal, she specializes in real estate, business, personal finance, and legal topics.
If you live in the city of Ripon, or Ceres, CA and need assistance in doing a short sale, please feel free to contact me. Let’s work together through this.
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