Here is a blog I ran on another real estate blog I was writing while working as a real estate salesperson in the San Francisco Bay Area.
It was important to talk about then and is still important to talk about now. Here it is…
Let’s talk about loan modifications (and short sales) and the loan packages that hate them.
Recently, I was asked to talk with someone about how to get a loan modification. After quite a bit of discussion I realized I hadn’t asked the $10,000 question. And it is literally that because the answer determines whether or not a person can short sale or get a loan modification at all.
Case Study: This really happened and this is not a dramatization of what occurred. My husband and I decided to sell our beautiful Queen Anne Victorian in the Hawthorne District.
We’d spent the previous 6-1/2 years renovating that beautiful house but its constant need for our attention had become more than we could bear. We were married to our house. We finished all the unfinished projects and put the house on the market. It sold very quickly.
We promised ourselves we’d stay within our price range and that we’d never, ever buy another ‘old’ house again. That was before the huge, restored 1900 Craftsman with loads of character caught our eyes. Oh! We were in love! It had a grand presense, porches on every side of the house, and it sat on 2-1/2 lots near Mt. Tabor. But it was a tad more expensive than we belived we could afford.
“Not to worry,” our loan officer assured us, there were “loan products” to assist people like us! We offered the top of our budget, our offer was accepted, and the loan papers were drawn up.
Caveat: I was not working in real estate as a real estate sales professional at the time and I was not as savvy about loan products as I am today…
When my husband got a copy of the loan papers to sign he noticed something very strange. While we were thrilled with the initial interest rate for the interest-only ARM loan, the loan officer who filled out the paperwork had written in a number that incorrectly represented my husband’s salary by over 100%. My husband called the loan officer and asked that she change it to his actual salary.
And folks, this is where an error of judgement occurred that could have landed my husband in court for loan fraud and that is currently landing many desperate homeowners in court – the loan officer told my husband this, “Oh, that’s alright. That’s what we have to do when we use this loan product. Don’t worry about it. We do this because it’s a ‘self-stated-income’ form. We can write whatever number we think is prudent in there and it’s perfectly fine.”
Wrong. It was not fine. Occurring was an improper use of that loan product. But we weren’t loan specialists so we took her word for it. She used that loan product because it allowed her to write in whatever amount she thought necessary to allow us to purchase that house. In reality, the house was too expensive and we should have kept looking.
Self-stated interest loan products are for people who are self-employed or who own their own businesses and who likely write off most their profit to keep their taxes low, to keep their businesses going. Today, if my husband and I decided to get another home loan, we would probably get a self-stated income loan because I am self-employed as a real estate professional.
Fast-forward 3-1/2 years to 2008. The real estate market was tanking and we needed to sell our home because my husband transferred with his job to California. We did sell it at a time when the average home in our price range stayed on the market for over 6 months. But to do that we took drastic measures. Before we put it on the market, we had the home inspected, the roof cleaned, the windows professionally cleaned, paid a housekeeping crew to clean the bathrooms and the kitchen, had the sewer lateral inspected and paid $7,000 to fix a discovered problem, finished every single unfinished project, moved half our things out of the house and into a giant storage unit, and staged the house with our remaining things. We sold in about 2 weeks.
We sold our house and made $20,000. The $180,000 in renovations we put into it were for the new owners, not for profit. But at least we didn’t try to get a loan modification or short sale…because, you see, if we had attempted to get either one, though we didn’t know this at that time, we could have been prosecuted for loan fraud.
Today, in an effort to prove they have adopted more careful measures than used in their pasts, some banks are double and triple checking the loan modification and short sale applications. They also ask for a ton of paperwork and sometimes request the original loan application paperwork for the home loan being modified or short-sold.
If you have a self-stated-income, or “no-income-verification,” loan you will need to provide evidence that substantiates the income stated on the original loan application. If you cannot prove you actually earned the amount stated on the loan application, and you signed that application, you could be prosecuted for loan fraud. And to make matters worse, the amount of money often involved in a home loan is high enough that the crime can be considered a felony.
What about the loan officer’s culpability?
A home loan is a contract. The contract is not valid without an authorized signature of a representative of the lending institution and the signature/s of the borrower/s. When we signed the loan forms, the contract became valid. The loan officer’s signature is not required to make the contract valid. Therefore, the legal burden belongs to the parties to the contract – the bank and the borrowers alone.
We walked away from a traditional sale of our home relatively unscathed. Ther loss of investment we made in the house stung, but we didn’t have to short sell it. Had we waited another couple of months to sell, we would have been considering a short sale. Had we gone ahead with a short sale or loan modification, the creative license exercised by the loan officer who drew up our original loan paperwork could have landed us in court.
Do you have a self-stated income loan? If you do, can you prove you actually earned the income stated on the loan application? Make sure you can do that before attempting a loan modification or short sale. That extra bit of due diligence is worth the time it will take to muddle through that long form paperwork for the trouble it may save you.
If you have any questions about real estate in the Portland Area, please feel free to contact me at (971) 258-5500 or email me at Amy@AmyMunsey.com