Recently, there was a great article on Moolonamy, about this topic.  The article entitled, “Is It Better to Buy or Rent?“, gives some excellent facts and figures.  There is an wonderful chart outlining the costs and benefits of renting vs. owning a home.

In this economy, with the uncertainty that comes with your job and your financial stability, buying a home is a big decision and renting may be a better option.

Are people just better off walking away and starting again?

This discussion began to get heated in October, when there was an article published on the Wall Street Journal blog written by an economics professor that stated that homewoners should walk away from their mortgages, in certain circumstances.  In “It’s OK to Walk Away, A Law Professor Argues“, there is an argument that walking away from your mortgage is more of an emotional or moral issue than a financial one. People feel as though they have a moral or ethical responsibility to stay in a home they can no longer afford or is “underwater.”

Today there was another article published by WalletPop, called “Is It Immoral To Walk Away From An Upside Down Mortgage?”, which discusses this topic one more time. The author discusses the issue as not so much a financial one but more of a moral and ethical decision. Homeowners need to accept the fact that they cannot afford the house any longer and make a decision to walk away.

There are many arguments on both sides of the argument. There is no right answer for everyone. There is no one who can make a decision of this magnitude for anyone else. There are definite financial consequences if you walk away from your mortgage. There will be severe damage to your credit score and your financial history. It will make it difficult to get credit or even rent an apartment for some time. However, there may be worse financial consequences if that homeowner stays in the house and lives off their credit cards to get by every month and ends up in foreclosure anyway.

The moral and ethical consequences can also be severe. People associate their homes with their families and their self-worth. They think that walking away means they are a failure. They have failed their families and themselves. However, walking away may help them save their families.

Before anyone walks away from a mortgage, there are many different factors that need to be considered. If you feel as though this may be something you are considering, you need to talk to a professional, either an attorney or a financial advisor, who may be able to help you make the right decision.

I know that this is a topic that people feel very strongly about.  What do you think?

Get in Front of It!

If you have the ability to foresee financial trouble, call your lender and get on a temporary modification or forbearance plan. You are not the first person to experience financial difficulties in your lenders portfolio and they have plans in place for short term help. You will need to document the problem and prove to the lender this is a real issue that will resolve in a short time, but they are typically willing to help.

Too Late

If you are already behind on your mortgage, the battle is more difficult but not altogether lost. Lenders do not want your home, they want your money! Therefore they are willing to help in most circumstances. The trick here is start as soon as possible, do not wait until the lender is calling you and begins the legal process. Try to be proactive and get a resolution. If you are unable to resolve the problem then you may need professional help to deal with the lender and try to help get things back on track. The further behind you are, the harder it is to get a resolution.

How it Works

Lenders work on a DTI (Debt To Income) ratio, this is your provable income verses your provable debt. The rent you get from the illegal garage apartment that you don’t claim on your taxes and the money you borrowed from Aunt Marie don’t count here. The further behind you are the more money you need to get out, plus you need fees, late payments, interest, principal and the all important but often overlooked escrow shortage.

Lenders will not help you unless you can afford to be helped. That means, if a lender has predetermined repayment plans and the longest plan adds more to the mortgage payment than you can afford then the repayment plan will not be offered to you. Lenders also feel like they are helping you, so if they offer a plan and you fail to make the payments they will not offer you a new one without extenuating circumstances.

Can’t afford repayment… Help

Next step is a loan modification or bankruptcy. Loan modifications offer a borrower the ability to rewrite the loan in terms that are affordable to the borrower and still give the lender some benefit of the mortgage. The Government Guidelines call for a lender to lower interest rates and extend the term of the loan so that the borrower is paying out 31% of their gross monthly income to mortgage payments. The issue here is that not all lenders are mandated to follow the guidelines and private modifications have been offered in many cases. These are typically shorter in duration and don’t offer the same relief, but some relief is better than none. Some investors will not offer modification terms and others require that the borrower be late before a modification may be offered. The Federal Guidelines specifically state that a borrower does not need to be late to obtain a loan modification and all participating lenders must abide by that rule.

Bankruptcy

There are two types of bankruptcy available to homeowners, Chapter 13 and Chapter 7. Homestead exemptions are different by state; however most states allow a debtor to keep their home if they do not have too much equity and can prove the ability to make the payments. The newest trend is the Bankruptcy Court’s willingness to move secured second mortgages and even portions of first mortgages from the secured creditor side to the unsecured creditor side. If a property has lost so much value that more is owed on the property than it is worth, then that portion that is no longer secured has beed seen by the Courts as unsecured and dischargeable debt.

Help is out there! It is not always easy to obtain and results vary. Professionals are available to help you meet the demands of this new and floundering economy but we are all wondering around in the dark a bit. Participating lenders are not obligated to help their borrowers unless forced to offer loan modification plans to their borrowers by the Government. However there is no rule that the banks have to make obtaining a modification easy. Delay, confusion and collection tactics are often used by lenders. It seems counter-intuitive for lenders to act they way they are acting because it is not profitable for a lender to own thousands of nonperforming loans or distressed properties. Although workout plans, temporary modifications, permanent modifications, and forbearance agreement are not ideal for the lender, it is good business sense to make some money than none at all.

Related Posts

1. How Long Does A Loan Modification Take?

2. Streamlined Refinance As An Alternative To A Loan Modification

Many financial experts and advisors cannot figure out why the loan modification process doesn’t work. I am going to tell you why the process doesn’t work and why most people need to hire someone to help them obtain a loan modification.

First

The borrower must submit a financial package. The trick here is that you must send exactly what the lender requires and you must fit within exact guidelines. The problem is that the lender normally fails to inform the borrower of exactly what they need, what counts as income and what counts as expenses. For instance, many lenders count rent as income but only allocate a specific portion of the rent received. Some lenders count all the rent some 75%, others as little as 50% and yet other don’t allow rent at all. Many borrowers although collecting rental income do not claim that income on their taxes or have illegal apartments, does that rent still count? Depends on the lender. For a unified system there is a lot of wiggle room on the lenders side.

Second

The borrower must send documents into the lender via facsimile or scan and the amount of paper required is astronomical. Many of the borrowers do not own a scanner or fax machine and are therefore unable to submit the documents without enlisting a service such as Kinkos or Staples and the money spent in faxing alone may be significant. After all of the faxing is done, there is a wait until the papers appear in the lenders system and they are often lost, misplaced or simply don’t arrive requiring a resubmission.

Third

It is the borrower’s obligation to stay on top of the modification. Lenders rarely inform borrowers of missing documentation and after a short time simply delete the modification request due to an incomplete submission. The borrower must then start all over again. The real issue with this besides the time and expense is that it can take months for the lender to issue a letter to the borrower stating the modification was denied for lack of documentation. The lender will not inform the borrower what was missing and if the missing paper is one required by the lender but not specifically stated as required as mentioned earlier, the borrower’s package is once again denied and the borrower may never know what the issue is. With this in mind the borrower must call the lender all the time, a minimum of once a week during normal business hours in many cases and wait on hold for an hour just to get the wrong customer service representative on the phone. Most borrowers do not have the time, patience or ability to sit on hold for an hour while at work to deal with personal issues like this and could risk losing their job just to get a five second answer from their lender.

Fourth

Problems! What does a borrower do if there is a problem, if his/her taxes are not correct, income is difficult to prove or if they are told they don’t qualify when they clearly do? Most borrowers give up. The lender knows the rules. Right? Wrong. Most customer service representatives do not know the law or the guidelines, they do what the computer tells them to do. In many instances the information entered into the computer is wrong or misapplied especially where contributions and rentals are concerned. Many borrowers live with relatives or a spouse who helps support the premises and contributions from those individuals are counted at 100% not reduced like rental income is. Little errors like this can be the difference between approval and denial but the typical borrower doesn’t have access to this type of information, doesn’t know what questions to ask, and doesn’t know how to make the corrections necessary to get through the system.

Fifth

Updating the material the lender has for consideration and changes in circumstances can be a full time job. Many lenders require that the information they have in their system not be older than 30 days. This is interesting since it is the lender that is taking 90 days from the initial request to even consider the documents sent over. Lender will deny a modification request based on expired documentation and delete the request from system before they issue a letter to borrower requesting updated documents. The borrower is supposed to know that he/she is responsible for constantly updating the lender with pay stubs and bank statements as well as profit and loss statements in many instances and that failure to do so may jeopardize their ability to modify their mortgage.

In many instances, obtaining a loan modification is nearly impossible for a homeowner on their own. The “red tape” that is created by the banks can be overwhelming to a homeowner who has never applied for a loan modification before. Also, what one bank requires is different from another bank, so enlisiting the help of a friend or family member who has sucessfully obtained a loan modification is not always helpful. 

The system is designed to make it difficult to obtain a loan modification but it is possible. There are hurdles to overcome but it is possible. Know what your bank requires or enlist the help of a licensed professional. Its your home and you should get to keep it.

Related Posts:

1.  How Long Does A Loan Modification Take?

2. Do I Need To Hire An Attorney To Do A Loan Modification?

3. The Top Five Loan Modification Myths!

The best answer that I can give you is that the best way to speed up the time to get a loan modification decision is to make sure that the information you give to the bank is complete. Everytime that the bank has to request a document from you adds more time to them making a decision.

When you send your information to the bank, make sure that you have signed everything and send them everything that they have requested. (Every bank has a different set of requirements for documents that they want to see).  To see the requirements from some of the major banks, such as, Bank of America, Chase, Citibank, and One West Bank, check out their websites.

If the bank does request additional documents from you, make sure you get them to the bank in the time frame that they require. If they tell you that you have 10 days to get them your most recent bank statement, that means you have 10 days until they remove your file from their system. Once your file is removed from the system, you will have to begin the process again.

Remember, that every bank’s time frames vary, but if you give them all of the information they need from the beginning, you will have a better chance of getting a loan modification quickly.

Related Posts:

1. Loan Modification With Banks Not Participating In The MHA Act

2. The Top Five Loan Modification Myths!

Standard Fees

These fees apply to everyone regardless of where you purchase real estate. These fees include what are known as title fees which include, recording deeds and mortgages, searches run against the premises and people involved, and a one time insurance policy purchase to insure the buyer that they have the most superior to claim to ownership. Title insurance also insures the lender that they are in the first lien position.

Jurisdictional Fees

In New York, there is a tax placed on mortgages. Throughout the state, New York charges a a tax of .8% of the mortgage amount in taxes. In NYC, the City adds an additional tax of 1% of the mortgage amount. Additionally, New York State charges a processing fee of $125.00 to process some of their transfer documents and tax returns that are required.

Bank Fees

If you are using financing from a lender, there will be bank fees involved. Bank fees depend entirely upon the lender, your credit score, income, risk assessment and program you qualify for or choose. Therefore, there is no hard and fast rule as to lenders fees. However, there are some fees that are relatively standard; appraisal fee, credit fee, flood certification fee, tax assessment fee, document preperation fee, establishment of an escrow account, short term interest and a point ot two. If you are obtaining an FHA loan, there is also the addition of MIP (Mortgage Insurance Premium), which equals about 2% of the loan amount.

Attorney and Miscellaneous Fees

In addition to all of the fees above, there is the business of paying your attorney and other miscellaneouse fees such as adjustments for city, school, village and other taxes, transfers of warranties, water and sewer, etc… these fees are not standard. Therefore, they can be difficult to estimate which is why you should hire an experienced Real Estate Attorney who can help you determine these amounts.

Summary

As a general rule, we always tell our buyers to estimate that they will need 5-6% of the purchase price for closing costs. As long as they are prepared to have that amount of money available for the closing, if the amount is a little lower, it will be a pleasant surprise.

Attorney

If you have not already found a Real Estate Attorney, now is the time to find one, and rather quickly. We suggest getting a reference and really doing your homework here. Your attorney plays a tremendous part in just how smoothly your closing will go. In this area of law, like every other, not all attorneys are created equal. The best personal injury or family law  attorney most likely has no idea about title issues, bank costs and fees, zoning regulations and I would be willing be to bet can’t read a schedule “A” description or survey. Simply because Real Estate Transactional Law is typically non-adversarial does not mean that anyone is able to do it. The typical fee for representation in a typical residential real estate transaction can range from $1000.00 to $2,000.00 barring any extreme circumstances. Most attorneys fees for real estate transactions are a flat fee and not calculated on an hourly basis. Many people look at these fees and get a little sticker shock but put into perspective, this is normally less than one half of one percent of your purchase price. If the house you are purchasing is bank owned or a short sale, the fee is a little higher because of all the additional work that it entails, if the premises are sold for more than $1M then the fee is higher due to the additional liabilities.

An experienced Real Estate Attorney will have his/her fingers on the pulse of the Real Estate and Mortgage markets and will know if your mortgage is a “good deal” or if you are being taken for a ride. He/She will know the current available mortgage loans and the requirements to obtain those loans, the general interest rates for each type of loan, your estimated payments, and what reasonable fees are for the lender for each loan program. He/She will have relationships with mortgage lenders, title companies, appraisers, surveyors and the like to help get things done quickly and smoothly. Your Real Estate Attorney should be able to help you not only through the actual purchase of the property but also through the financing, post closing issues, tax exemptions and the like, knowledge that is gained through repeated closings and not generally available to the entire legal community. We generally advise purchasers, especially inexperienced purchasers to avoid using the attorney pushed on them by those people (brokers) involved in the transaction. There exists the possibility that the attorney, although representing you, may have loyalties to the broker as well as you.

Contract

The Seller’s attorney (in New York) will prepare the Contract Of Sale and forward it to your Attorney. You and your attorney will review the contract and make sure that the entire agreement you negotiated with the seller is contained in the contract itself. If there is a term of the deal that is not contained in the Contract of Sale, that term will no longer exist as the contract specifically states that it contains the entire bargain. Make sure the purchase price, down payment, and mortgage contingencies are correct. Make sure that the seller’s concession is correct, repairs to be done are listed, and adjustments or credits are listed or at a minimum referenced as many adjustments cannot be made until the date of closing is set.

Closing

On the prescribed date, you and your attorney, the seller and the seller’s attorney, the bank and their attorney and the title company will meet up. A host of documents will be set forth for you to sign. You attorney will review them with you, make sure the interest rate, term of the loan, and costs are accurate and are what you were told they would be. Read the loan application (known as a 1003) and make sure the information contained therein is correct including, occupation, monthly pay, yearly pay, liabilities, and the like. If you ever default and the 1003 is incorrect you could be accused of fraud. The moist importanf document, the Deed, will be executed by the seller placing you in title as the owner of the property. Make sure that your attorney explains to you all the different ways available to you to own the premises and the ramifications of each type of ownership.

After you have signed all the documents, the attorneys will divide up all that money. Most likely the money will be spent as follows, payoff seller’s mortgage, pay title company, pay attorneys, pay title closer, remainder to seller.

This is most likely the largest expenditure you will make in quite some time so enjoy it, it is not everyday you write a check for a few hundred thousand dollars. Once everyone is paid, the keys will be passed over, the title company will send the deed for recording at the County Clerk’s Office and you are the proud owner of a home, Congratulations!

Related Posts:

1. 7 Days To Owning A Home

2. 7 Days To Owning A Home: Day 1 – Your Credit

3. 7 Days To Owning A Home: Day 2 – Financials

4. 7 Days To Owning A Home: Day 3 – Where To Live?

5. 7 Days To Owning A Home: Day 4 – Where Do I Find My Dream Home?

6. 7 Days To Owning A Home: Day 5 – Brokers

7.  7 Days To Owning A Home: Day 6 – Found It

Try to modify your loan on your own. It is possible. If you do not want to do it yourself, hire an attorney. Hire an attorney who has experience in this area. Experience is key. You need someone with connections at the banks, knowledge of what the process is and the ability to make an educated decision as to whether or not you will even qualify. You want someone who can give you other options or help you make a decision about what to do next.

A loan modification may not be the best solution for you. However, you want to discuss all of your available options with someone who is qualified to help you make the right decision for you. A company that only handles loan modifications will not be qualified to discuss alternatives with you.