Short Sale vs. Loan Modification vs. Short-Refi

(My Original Blog Post: http://www.minnesotainvestors.com/blog/short-sale-vs-loan-modification-vs-short-refi/)
You are in your current home right now and you are deciding what to do, you are looking at all of your options:
There is 1 decision you MUST consider as the first step:
Are you staying in your house, or leaving your house?

Let's go one step further...
Do you want to stay, or are you being forced to leave your house.
We understand why you want to stay, you have money in the house, your kids grew up in the house, they are in the
school system, and many other reasons.
Let's look at the reasons that you are being forced to leave your house:
A: Your payment is adjusting upward and you can't afford it
B: You, a spouse, significant other or family member have lost their job
C: You have had some health problems and set backs
D: You have far too much debt or credit card debt
E: You are near bankruptcy
F: The house needs too much fix up, or maintenance and you can't afford it
G: Their has been a death in the family, and costs are incurred
As we've discussed above there are a lot of reasons why you must leave a house.

Below I am going to discuss all of the major options for leaving your house and staying in your house,
Then I am actually only go into detail on Short Sale, Loan Modification and Short-Refinance.

Staying in your house
1. Do a Short-Refi-
-Before foreclosure is filed
-Current lender or new qualified FHA lender
-Close within 120 days or less
-Loan amount for new BPO at market value
-Approximately $225 out of pocket
-Need tax returns, w-2’s, 1099’s, check stubs, bank statements, etc
-Discharged Debt (Taxes possible see Mortgage Debt Relief Act of 2007)
-Debt-to-income as high as 45%
-Don't need to be behind in payments
2. Do a Loan Modification-
-Usually no loan principle reduction
-Usually redo the amortization
-Usually redo the interest rate, sometimes lower
-Usually fixed interest rate
-Usually if you are behind in payments
3. Do a Foreclosure Extension-
-Delay foreclosure 6-12 months
-Doesn't always work with a short sale
-Great for little time left in redemption
4. Do a Refinance-Rate/Term and Cash-out Refinance
FHA Streamline
620 Minimum (currently)
No Appraisal
No Income Verification
No Asset Verification
Will need to Credit Qualify
Cash Out up to 85% LTV will require new Appraisal

Rural Development Streamline
620 Minimum (currently)
Available with or without Appraisal
Income and Assets Verification Required
Will need to credit qualify
Cash Out up to 95% will require new Appraisal

VA Streamline
620 minimum (currently)
Appraisal may not be required (varies by Lender)
Income/Asset Verification may not be required (varies by Lender)
Will need to credit qualify
Cash Out will require new Appraisal

Leaving your house
1.Rent out your property-
-If you aren't in foreclosure, or don't plan on it
-If rent may be less than your mortgage payment, must be able to afford
-Can provide you with property management
-Provide you with rental placement of the tent, credit checks, marketing, etc
-Renters insurance recommended
2.Lease Option your property-
-Ideal for a little bit more of a serious renter with an option to buy
-Could be your potential future buyer
-Typically a little more money upfront with an option vs. a deposit
-RTO buyer recommended to enter credit repair
-Owner still pays insurance and property taxes
-House shouldn't be over-financed
-Repairs are negotiable in the contract
-Option and monthly payment credits towards purchase are negotiable
-12-36 months until financing are standard terms
-Renters insurance recommended
-Owners judgments could still attach to the house
-Once recorded owner may not easily be able to file new mortgages
3.Sell on a Contract for Deed-
-May make sense for taxes on an installment sale, ask your accountant
-Buyer pays property taxes and insurance, added additionally insured recommended
-Buyer puts down 5-10% typically
-Down payment should be able to be used for future purchase
-12 months of on-time payments typically qualifies for a buyer's refinance
-Owner still has the deed
-Minnesota law requires to be recorded
-Owners judgments could still attach to the house
-Once recorded owner may not easily be able to file new mortgages
-Seller please see due-on-sale clause in mortgage contract per the lender
-Quick closing
4.Sell your House's Deed-
-If you don't think you can sell, sell your deed and the house, vacate the house
-If you have little equity, sell your deed and the house, vacate the house
-Mortgage will still stay in owner's name until new buyer gets a loan and pays off liens
5.Sell your equity house by listing it-
-List it on the MLS
-Full service listing/marketing/selling by a listing agent
-Agent shows houses, or has a buyer's agent show houses
6.Sell for higher than the low bid at the sheriff sale-
-These days, lenders often sell short at the sheriff sale off the original loan amount
-List it on the MLS for more than the low bid amount at the sheriff sale
-Full service listing/marketing/selling by a listing agent
-Agent shows houses, or has a buyer's agent show houses
7.Sell on a Short Sale-
-Best for little, no equity, or over-financed houses
-Beneficial for satisfaction and discharging debt negotiating
-Minimal fees- city inspection, association dues may apply
-Great for those with 2nd and 3rd mortgages
-Great when you want to sell
-Take many months of bank negotiating, and listed on the market
-Often you can take advantage of the mortgage debt relief act until 2002
8.Property Management-
-Renter placement
-Fix up and contractor calls taken care of
-Leases
-Credit/background checks
-Can manage entire portfolio's
-much much more

*If you can't sell, by renting or selling on a contract for deed, you can count 75% of rental income to offset your
Debt-to-Income Ratio (total monthly payments divided by gross income) when qualifying for a loan
*if there is an outstanding mortgage debt, must have 6 months PITI and MI in reserves for both properties"
*FYI, there is a very beneficial IRS tax law that requires you to live in your house 2 of the last 5 years before selling

Now that you as the homeowner know your options, let me discuss: Short Sales, Loan Modifications, and Short-Refinance

Deciding amongst the 3 options above come down to this:
Staying = Loan Modifications and Short-Refinances
Leaving/Selling=Short Sale

Principle Reduction (Discharged Debt) *Possible tax benefits until 2012 see Mortgage Debt Relief Act of 2007 IRS.gov
Short Sales reduce the principle balance so that you can sell
Short-Refinances reduce the principle balance so that you can adjust for a new lesser loan amount
Loan Modifications as a general rule will not offer the principle balance, even upon success, you may miss the 2012 deadline above

Timelines
The timeline you are at in the process may determine which option you need to go with:
0 payments behind-Generally a short-refinance is best, a short sale can be tough, but doable if it looks like you may fall behind
1-3 payments behind-Generally all 3 are a good option in this situation, just decide if you are staying or leaving, and principle reduction
Entered foreclosure-At this point loan modification and short sale are your two options decide if you are staying or leaving
After the sheriff sale-At this point short sale is your option, you have to come up with the full loan balance or sell on a short sale
After the sheriff sale-If your house sold for much less at the sheriff sale, then you could list the house for sale over that amount
4 months left in redemption-This is the minimum amount recommended to have time to negotiate and market your property
3 months or less in redemption-With little time left, a foreclosure extension may be your only option, please contact me

Money
Expensive-Most loan modification 3rd party companies want money upfront for doing loan modifications, sometimes in the thousands
Affordable- Short-refinances can be as little as $225.  Short Sales are no cost, but selling may require assoc. dues, city inspections, both affordable.

Qualifying
Not Qualified-If you shouldn't have been qualified originally or your circumstances may have changed you may not qualify for a loan mod or short-refinance
Qualified-If your credit/assets/money/job/debt ratio look strong on paper, then you may qualify for better rates and terms

Situation
Divorce may force you to sell
Probate or a death may force you to sell
Separation may force you to sell
Job transfer may force you to sell
Growing family may cause you to sell
Kids moving out may cause you to sell
Retirement may cause you to sell
Job loss may cause you to sell

As you can see much of the above is based on the factors that you decide, and the situations that decide for you.
Generally speaking when you try to qualify for a loan modification or a short-refinance, the qualifying will be like a home loan, but usually not as tough.
In all cases, short-refinance, loan modification and short sale, you have to prove to the lender your financial situation good or bad and why you
deserve to negotiate away your debt, or in the case of staying why you need better rates and terms.  In all scenarios as you can imagine the lenders
will need to see paperwork and gather your financial information to see the full picture of why they will work with you. Below I have created a list
of what will be needed for all three.  Please keep in mind that I used home loan qualifying steps for Short-refinance and loan modifications, whereas
they usually require a few less things, but could require a few different things.

I'd appreciate an email to ron@minnesotainvestors.com on your situation and how I can help you. At this time I am looking to work with
those not currently working with an agent/broker.


Short-Refinance and Loan Modifications

Pre-Approval Checklist-(It's recommended that you are pre-approved before looking at homes)
1003 Application Form for home loans Filled out by: Phone, Fax, In-Person, Mail, or Email (Please write Ron Orr on top)
Employment
____ Name, address and phone number of employers for the past two years
____ Copy of pay stubs for the previous 30 days
____ Copy of last 3 years w-2/1099 forms
____ Copy of last 3 years complete federal tax returns with all Schedules)

Self-employed
____ Copy of last two years tax returns (personal and corporate);
____ year to date P&L and Balance Sheet through the most recent quarter, must be certified by Accountant/CPA

Liabilities
____ Name and account numbers for all revolving and installment accounts
____ Name and account number for all mortgage loans for the previous two years
____ Name and address for landlords for the previous 3 years

Assets
____ Name, address, and account number for all bank accounts
____ Name, address, and account numbers for all brokerage accounts
____ Copies of statements covering last 3 months on asset accounts
____ Copy of most recent statement for 401K, Savings Plan, etc.

Miscellaneous
____ Copy of driver's license and social security card
____ Copy of fully executed divorce decree if applicable
____ Copy of fully executed child support court order if applicable
____ Copy of signed earnest money contract
____ Copy of lease agreements on rental properties.  must have 2 year history reflected on Taxes to use Rental/Border income
____ Veterans! Copy of DD 214 and Eligibility Cert. if you have it, if not need Company Clerk contact info
____ Check for the cost of your credit report and appraisal

Short Sale Information:

Property Title Info:
Currently Single?
Divorced?
Divorced When? Borrower Info:
First Name:
Last Name:
Home Phone:
Cell Phone:
Best Time to Call:
Email:
Fax: Co-Borrower Info:
First Name:
Last Name:
Home Phone:
Cell Phone:
Best Time to Call:
Email:
Fax:

1^st Lender Info:
Lender Name:
Amount Owing:
Monthly Payment:
Payments Behind:
Reinstatement Amount:
Type of Loan: Conventional, FHA,VA
Do you pay PMI:
Account #:

2^nd Lender Info:
Lender Name:
Amount Owing:
Monthly Payment:
Payments Behind:
Reinstatement Amount:
Type of Loan: Conventional, FHA,VA
Do you pay PMI:
Account #:

Property Info:
Are you working with a real estate agent currently? MLS#?
Address: City: Zip: County:
Bed: Bath: Garage Stalls:
Property Style Type: Multi-Unit? Sq Ft? Year Built?
Estimated Market Value:
Does it need repairs: Estimated $:
List of repairs needed:
Sheriff Sale Date:
End of Redemption Date:
Is the property currently occupied or vacant?
Have you had a bankruptcy? Date When? Date Discharged: Chapter 7? Chapter 13?
Other liens on the property? Any judgments? Past due water bills? Past Due Taxes?

Short Sale Documents that we will need soon from the homeowner are:
1. Signed Authorization to Release form
2. Tax returns for the last 2 years (1040)
3. Pay stubs from last 2 months (+spouse)
4. Bank statements last 3 months+ (joint accounts)
5. Recent mortgage statements for all properties
6. Hardship letter (handwritten)
7. Financial form will be provided
8. P&L statement for Self Employed and Properties