The Homeowners Edition
Table of Contents
What is a Loan Modification………………………………………………….…………. 3
Who Qualifies for a Loan Modification…………………………………………………. 4
Loan Modification Timeline……………………………………………………………... 5
Establishing Your Goals……………………………………………………………...… 7
Building a Case for your Loan Modification……………………………………...….....16
Fax Cover Letter.......…………………………………………………………………....16
Loan Modification Cover Letter………………………………………………………....17
Income vs. Expenses…………………………………………………………………...20
Preparing a Loan Modification Proposal……………………………………………….25
Preparing your Load Modification Package……………………………………………26
Identifying who you are Negotiating with…………………………………………..…...28
Negotiating with your Lender……………………………………………….…………..30
Finalize the Process………………………………………………………….…………32
Other Options when Loan Modifications Fail……………………………….….………33
Glossary of Terms………………………………………………………………………38
This chapter explores the basic fundamentals of Loan Modifications. We will take a look at the type of
homeowner who currently qualifies to modify their loan and why the banks are willing to work with them. It
will also provide other options for homeowners who fail to achieve a Loan Modification. This will help you
understand Loan Modifications.
This e-kit serves as a guide to Loan Modification with the result of keeping you in your home.
What is a Loan Modification?
A Loan Modification is an agreement negotiated between you and your Servicer-Lender (Bank). It allows
the homeowner to attempt to change the terms of their current home loan. Possible modifications to the
characteristics of the loan include, but are not limited to, the term, rate, balance, past due amounts, fees
and penalties. During uncertain economic times, Lenders became willing to negotiate these terms of your
loan when you are facing financial difficulties and the Lender sees potential foreclosure in your future.
You must be able to prove to your Lender why it would be in both of your best interests to agree to a Loan
Modification. Lenders are often willing to lower the current interest rate, convert Adjustable Rate Mortgages
(ARMs) to Fixed-Rate Mortgages, and allow longer amortization periods, while forgiving past due loan
payments, and roll them back into the new loan term. Sometimes a lower loan balance can be negotiated
when the home is worth less than the balance owed.
The true goal of a Loan Modification is to save both the borrower and the Lender from foreclosure.
Remember that every Bank or Lender is different in how they handle their Loan Modification process.
Included are guidelines, comprehensive tools, worksheets, examples, and forms to cover any banks
needs and requests. There is no standardized procedure for Loan Modifications, as every bank and
Lender chooses to handle each as they see fit. Let's get starting by covering who typically qualifies for a
**It is important to understand that a Loan Modification is NOT reported to the credit agencies and will NOT have an adverse
impact on your credit scores.**
Who qualifies for a Loan Modification?
• Someone who no longer qualifies for a refinance
• Someone currently in an adjustable rate mortgage (ARM)
• Someone who is behind on their mortgage
(it is always recommended to make all mortgage payments as agreed upon)
• Someone whose mortgage payments have increased
• Someone who has experienced a hardship
• Someone who is self employed during tough economic times
• Someone who has no equity in their home or is "upside down"
• Someone who is about to go into foreclosure
Must I be late or behind on my mortgage to get the lender to modify my loan?
There have been many cases when the lender was educated as to why the payments have been made,
and why soon they can no longer be made. (Imminent Foreclosure) Regardless of your situations never
stop making your mortgage payments when you can afford to make them. Clean credit is an important
factor in your future success after your loan modification. The process is about showing the lender that a
hardship has occurred and you have remedied the situation. Keeping your credit clean and still modifying
your loan is an achievable goal.
Why are the banks willing to do this?
Today’s housing market is in total disarray, Lenders are losing money, and the economy in an spiraling
downturn, the banks would rather modify your loan terms then take on another Foreclosure. Equity in
homes has all but disappeared and in many instances become negative, leaving homeowners "upside-
down" on their loans. Banks would rather reduce the payments and/or balance than foreclose on another
property. Lenders are not in the real estate business, and they don't want to start now. The fact that they
are willing to negotiate lower payments brings about this part of the real estate cycle know as "The
Modification Period". Although extremely rare, during these periods, the bank and borrowers are
deemed powerless. Both face tough times ahead and only working together as a team can everyone pull
out of this real-estate tailspin. Working together allows Americans to stay in their homes and also to begin
to turn this recession around. Loan Modification's often equate to immediate financial losses for our
banking institutions, but the long term gain will far outweigh the short term loss.
Loan Modification Timeline
Days 1-5 - Preparing your Loan Modification Package
Get all of the forms, documents, letters, and information together to submit to your Lender. Make sure
you take the time to paint the best picture of yourself to your Lender. This is the most critical part of the
process! Careful planning and budgeting will allow you to truly understand where your mortgage payment
needs to be to allow you financial freedom again.
Days 5 - 30 - Loan Modification Package is Submission
Your completed Loan Modification package is submitted to the Lender for review and approval. Keep in
mind that the Lenders are swamped with modification requests so this first step can take anywhere from
2-45 days. Some Lenders prioritize the requests by placing the homeowners closest to foreclosure before
the others. The other files are reviewed based on the homeowner's current mortgage history. Make sure
to ask what the current time frame is when you get a Loss Mitigation Agent from the Lender on the phone.
Days 11 - 60 - Loan Modification Package Reviewed by Lender
Loan Modification process is different with all Lenders. Do not expect to get a decision quickly. During
their review process, they may ask for additional documentation; that is neither a good or bad sign, it
does mean, that they need additional information to determine your loan modification. Calling the Lender
daily can often hurt your chances of receiving the Modification you have requested. They are dealing with
1000's of customers attempting to do the same thing you are. The only phone call or email you should
make to the lender is to verify that they received your package. Then a follow up phone call once a week
to ensure they know you are serious.
Days 15 - 60 - Offer received from Lender
Loan Modification decisions do not always come back approved. Often times, decisions are subject to
additional documentation from the borrower proving the financial numbers provided. Whether you like the
first offer or not, you must realize that you are working towards the finish line. Decide to accept the offer
from the Lender or submit a counter proposal for review. At that point the waiting game starts all over
Days 18 - 90 - Offer accepted/or renegotiated
If the Lender accepts your offer and you agree with the terms and conditions, the modification process is
complete. The Lender, however, may make a counteroffer which you will need to consider carefully. The
Lender may want a different monthly payment than you think you can afford or to agree on other terms.
Days 20 -120 - New Agreement Signed and Notarized
Upon full approval from both parties, your Lender will finalize and prepare the official Loan Modification
Agreement. You will then sign the documents and have it notarized prior to returning it to the Lender.
Often the Lender will require submitting additional funds with your signed and notarized agreement. Make
sure to use certified funds for this. Make sure to move fast as many of these offers will have an
expiration date for the new modified agreement.
Establishing your Goals
When considering a Loan Modification, it is critical to understand what the Lender is looking for in their
decision to modify your loan. Loans which show the ability to repay based on the loans new terms are most
likely to have the best results, so painting the right picture to the Lender and knowing what changes will
really affect your ability to repay the loan is extremely important to the Lender. The goal in chapter 2 is to
establish what characteristics of this loan are most important in restructuring your loan to allow you the
ability to make the monthly payment as agreed without hardship.
The first question you must ask yourself is, what payment can I afford based on my current income
conditions? If you cannot afford any payments regardless of the rate, you need to skip ahead to chapter 8
now. This will show you the two alternatives to Loan Modifications. If you are "upside down" on your
mortgage and just want out, chapter 8 is for you as well (legal advice is recommended before attempting a
short sale or deed in lieu). The true Loan Modification is for the borrower who truly wants to remain in their
home. So assuming you want to fight to keep your home, let's establish the ultimate goal of this
1- Lowering your current interest rate - The most obvious, basic and easiest aspect of your
loan to modify is your interest rate. A lower rate simply means a lower payment. This is part of almost
every loan negotiation as it often has the largest affect on the overall success of the modification. Unless
your current loan is less than 6%, make sure you include a rate reduction with your modification proposal
(we have seen loan modified as low as 4% fixed).
2- Fixing in an Adjustable Rate Mortgage - This is one of the most common reasons for
the bank to modify your loan. With interest rate going up on ARM's (Adjustable Rate Mortgages),
borrowers are not able to make the higher payments. Because we have seen such an outbreak of
foreclosures in the past, Lenders are now being subject to re-evaluate how they look at these types of
loans. If the borrower has a proven track record of on time payments prior to the rate increase, most likely
the bank will adjust the rate back to its starting place. The goal is to get the rate lower than it was before it
was adjusted. In order to do this, the owner needs to explain that they are living day to day, scratching
and kicking to barely make their payments, and would like to improve their situation. One must tell the
bank that they need a lower rate, so that they are able to resolve other financial issues. Most Lenders are
willing to help lower interest rates to qualified applicants when the applicant is not requesting a balance
reduction or amortization increase as part of their modification proposal. This is the easiest, safest and
least painful modification for the Lender. If you decide that aiming for an Interest rate reduction is your
primary goal, then attempt an extremely low rate modification in your proposal. The bank would rather
keep the balance owed the same, and just receive less interest on their investment then loss it all
together. Be friendly and polite, letting the loss mitigation representative you're working with know how
wonderful they are for assisting you with this negotiation. These people are humans too!
3- Making Mortgage Current on past due amounts - Are you currently 30, 60, 90, or
even more days behind on your mortgage? Sometimes just making your loan current is enough to get
yourself back on track. Getting the Lender to make your 'past due loan' current may be the biggest factor
for you to get back in the drivers seat. This is another piece of the modification that the Lender is willing to
work with. Most Lenders will take the amount past due and apply it to the balance of the loan. This alone
can help many Americans stay in their homes.
4- Lowering your mortgage balance (principle balance reduction) - The principal
balance reduction is the most challenging of all Loan Modifications. The Lender will be forgiving a portion
of your loan debt. In layman's terms, you no longer owe the bank that additional money. Banks and
Lenders are not as likely to do this because of the immediate loss taken in the form of a lowered balance
on a note due to them. This is a loss that the Lender cannot recover therefore the hardest to negotiate into
your Loan Modification. When banks do actually decide to offer a reduction in principal balance they do it
because they have deemed the property to be valued much less then the balance owed by the
homeowner. Proving that you are so upside down on the property that walking away from it may be the
best solution can make all the difference in the world to the Lender. If you owe $500,000 on a $350,000
property, why would you want to continue to make mortgage payments on the property? Even if you were
to wait it out until the market regroups, you have no way of knowing how long it would be until the
property value reaches $500,000 again. It would simply be smarter to walk away from the home, absorb
the credit hit, and find a similar house to rent for much less then you are paying. Then, down the road,
after saving enough money from renting, you could buy back a similar home for 350,000, putting down
If you are negotiating a loan balance reduction, make sure to make it reasonable. You will need to prove to
the Lender that current market values have dropped in your neighborhood. Use www.Zillow.com to get a
good idea of what homes are usually worth. If Zillow doesn't offer the value's you are looking for, try
contacting a local appraiser for assistance (most likely for a cost). Another option is to drive around and
pick up as many flyers of homes for sale. Getting foreclosure information for your area can be found at
your county tax assessor's office.
Negotiating a Principal balance reduction is much easier to do when you have a first and second
mortgage. The second mortgage Lender knows that in the case of a foreclosure, they will most likely get
nothing. Before any portion of the second lien is paid off, the first lien holder must be paid in full. That's
why second mortgages are often given at higher interest rates to offset the losses that might occur. At
that point, whatever is left over goes to the second lien holder. Lenders who financed both loans are
subject to giant losses while recouping nothing in a foreclosure. Since banks realize this, they are much
more likely to negotiate a reduction in one or both of your principle balances. The banks would much
prefer reducing your balance in the hopes of you making future financial obligations to them over
potentially losing everything.
When it comes to dealing with first and seconds loans, we must first determine if they are with the same
Lender. If they are with the same Lender, you are in a favorable position to reduce your loan balance as
the Lender wants to keep the first lien paid as agreed, which is profitable for the lender. At the same time,
understanding that the second lien is not likely to see any return if the customer was to foreclose on the
property. It is possible to get the rate of your second mortgage down as much as 80-90% from what you
currently owe. The secret is proving to the Lender that you will be able to resume making on time and
regular payments on the first mortgage. As long as you can prove that you can pay the first mortgage,
your Lender will most likely lower the balance of your second substantially. It is extremely rare that your
Lender will reduce both the first and the second when you are upside down on your home. As for first and
second loans with two separate Lenders, negotiating a principle reduction can be much trickier. The goal
here is to assure both Lenders (through proper documentation stating that with assistance with this
reduction, both lien holders will benefit from you being able to make timely payments. Once again, these
are negotiations, so don't be afraid to use the threat of foreclosure to persuade the Lenders to work with
you. Often in this situation, you are better off letting a professional Loan Modification Company assist you
in this tight-roping process.
5 - Deferring your mortgage payments (getting a payment break) - Often your Lender
will be willing to forgo several months of payments in an attempt to assist you in getting back on track.
Asking for 2-4 months of deferred payments is a great way of getting back on track. Use that additional
money to pay off other debts, and help get your finances back on track. Share with your Lender your ideas
for where you can apply the additional funds to better your financial future. It will make the Lender more
likely to work with you if you can show them how this will help in your ability to begin to repay this loan for
the long term. Do not spend these extra funds for unnecessary purchases that are often part of the reason
that got you here in the first place: overspending. 2 months is a good benchmark of deferment.
6 - Extending the amortization Period (years of loan) - Length of amortization is the time
it takes to pay off your loan in full. The most common amortization period is 30 years. The amortization
does not reflect the length that the interest rate is fixed, but the total years repaid. For example, if you
have a five year ARM (adjustable rate mortgage) amortized over 30 years, the interest rate will adjust after
5 years either up or down for the remaining or until refinanced or modified. In order to lower your monthly
payments, Lenders may decide to stretch out amortizations to 40 or 50 years. This will drop the monthly
payments substantially, since the borrower now has an extra 10 or 20 years to spread out the payments.
You will never be offered odd numbers like a 36 year amortization. The options for Loan Modification are
30, 40 and sometimes 50 years. We recommend you propose a 40 year amortization with every Loan
Modification (just another great way to keep your monthly payments down)
7 - Waive fees and penalties – Lenders generally will be willing to waive all additional fees
associated with your past due amounts on your loan. These are not seen as losses to the Lender, so they
are likely to work with you here. In some cases however, the Lender will attempt to collect these fees by
adding them to the balance of your loan. If your first proposal is partially accepted, make sure to weight
the options before making a second proposal. Often the fees can be the difference for the bank to make
the deal. For you, it's about keeping your home with a payment you can afford to make. Don't get so
caught up in getting fees waived that you end up overlooking the overall counteroffer from the Lender.
8 - Convert to an Interest Only Payment (tough to do) -Many banks will not even
entertain the idea of Interest Only payments, but it still remains as a short fix alternative if your future
financial picture appears to improving. The banks are not as likely to offer an Interest Only option as they
will not begin to get repayment on this loan for an extended period of time. If this is important to you as
part of your proposal, it is a good idea to ask the loan mitigation representative if Interest only is even an
9 - Stopping Foreclosure Proceedings - Obviously the ultimate goal in any Loan
Modification process is to stop a foreclosure and keep you and your family in your home. Executing a
Loan Modification will automatically stop a foreclosure process assuming it's not too late. If nothing else,
attempting to modify your loan will drag out your foreclosure process and keep you in your home a bit
Once you have determined these factors you can begin to decide exactly what you need to get back on
track. Is it a lower payment, or a lower balance on the loan? Do you need help getting caught up on your
mortgage payments? I recommend you attempt to negotiate several of these options into your Loan
Make sure to request that a 1099 is NOT granted to offset the loss taken from the lien holder as part of the
Mortgage forgiveness Debt Relief act of 2007. Many questions have arisen since President Bush signed
the Mortgage Forgiveness Debt Relief Act of 2007 into law, whereby in certain circumstances, a
homeowner does not have to pay federal income tax on debt forgiven on a loan secured by a qualified
principal residence via a short sale, foreclosure, deed in lieu, loan workout or short refinance where the
loan amount was reduced and forgiven in order for the homeowner to keep the property. It is sometimes
very confusing reading a bill with only references to other sections of the law. Below is information
pertaining to the Mortgage Forgiveness Debt Relief Act and Debt Cancellation:
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal
residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure,
qualifies for the relief.
This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this
exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the
lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions,
and Abandonments. Also see IRS news release IR-2008-17.
The following are the most commonly asked questions and answers about The Mortgage Forgiveness Debt Relief Act and debt
What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the
cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not
required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is
subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an
obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a
Form 1099-C, Cancellation of Debt.
Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to
collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.
Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and
applies to most homeowners.
Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you.
You are insolvent when your total debts are more than the fair market value of your total assets.
Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three
years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is
generally not considered taxable income.
Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the
property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default.
Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it
may result in other tax consequences.
These exceptions are discussed in detail in Publication 4681.
What is the Mortgage Forgiveness Debt Relief Act of 2007?
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17).
Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on
your principal residence.
What does exclusion of income mean?
Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the
Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt
reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?
No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to
refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal
residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1
million if married filing separately.
Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?
Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage,
immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681.
How long is this special relief in effect?
It applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012.
Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?
The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately
for the tax year), at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982 and the detailed
example in Publication 4681.
If the forgiven debt is excluded from income, do I have to report it on my tax return?
Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.
Do I have to complete the entire Form 982?
No. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other
purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form
only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal
residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your
mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Attach the Form
982 to your tax return.
Where can I get this form?
If you use a computer to fill out your return, check your tax-preparation software. You can also download the form at IRS.gov, or call
1-800-829-3676. If you call to order, please allow 7-10 days for delivery.
How do I know or find out how much debt was forgiven?
Your lender should send a Form 1099-C, Cancellation of Debt, by February 2, 2009. The amount of debt forgiven or cancelled will
be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the
amount that you enter on lines 2 and 10b, if applicable, on Form 982.
Can I exclude debt forgiven on my second home, credit card or car loans?
Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for
those purposes qualifies for this exclusion. See Publication 4681 for further details.
If part of the forgiven debt doesn't qualify for exclusion from income under this provision, is it possible that it may qualify for
exclusion under a different provision?
Yes. The forgiven debt may qualify under the insolvency exclusion. Normally, you are not required to include forgiven debts in
income to the extent that you are insolvent. You are insolvent when your total liabilities exceed your total assets. The forgiven debt
may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm
indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the
instructions for Form 982. Publication 4681 discusses each of these exceptions and includes examples.
I lost money on the foreclosure of my home. Can I claim a loss on my tax return?
No. Losses from the sale or foreclosure of personal property are not deductible.
If I sold my home at a loss and the remaining loan is forgiven, does this constitute a cancellation of debt?
Yes. To the extent that a loan from a lender is not fully satisfied and a lender cancels the unsatisfied debt, you have cancellation of
indebtedness income. If the amount forgiven or canceled is $600 or more, the lender must generally issue Form 1099-C,
Cancellation of Debt, showing the amount of debt canceled. However, you may be able to exclude part or all of this income if the
debt was qualified principal residence indebtedness, you were insolvent immediately before the discharge, or if the debt was
canceled in a title 11 bankruptcy case. Exclusion is also available for the cancellation of certain non business debts of a qualified
individual as a result of a disaster in a Midwestern disaster area. See Form 982 for details.
If the remaining balance owed on my mortgage loan that I was personally liable for was canceled after my foreclosure, may I still
exclude the canceled debt from income under the qualified principal residence exclusion, even though I no longer own my
Yes, as long as the canceled debt was qualified principal residence indebtedness. See Example 2 on page 13 of Publication 4681,
Canceled Debts, Foreclosures, Repossessions, and Abandonments.
Will I receive notification of cancellation of debt from my lender?
Yes. Lenders are required to send Form 1099-C, Cancellation of Debt, when they cancel any debt of $600 or more. The amount
cancelled will be in box 2 of the form.
What if I disagree with the amount in box 2?
Contact your lender to work out any discrepancies and have the lender issue a corrected Form 1099-C.
How do I report the forgiveness of debt that is excluded from gross income?
(1) Check the appropriate box under line 1 on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and
Section 1082 Basis Adjustment) to indicate the type of discharge of indebtedness and enter the amount of the discharged debt
excluded from gross income on line 2. Any remaining canceled debt must be included as income on your tax return.
(2) File Form 982 with your tax return.
My student loan was cancelled; will this result in taxable income?
In some cases, yes. Your student loan cancellation will not result in taxable income if you agreed to a loan provision requiring you to
work in a certain profession for a specified period of time, and you fulfilled this obligation.
Are there other conditions I should know about to exclude the cancellation of student debt?
Yes, your student loan must have been made by:
(a) the federal government, or a state or local government or subdivision;
(b) a tax-exempt public benefit corporation which has control of a state, county or municipal hospital where the employees are
considered public employees; or
(c) a school which has a program to encourage students to work in underserved occupations or areas, and has an agreement with
one of the above to fund the program, under the direction of a governmental unit or a charitable or educational organization.
Can I exclude cancellation of credit card debt?
In some cases, yes. Nonbusiness credit card debt cancellation can be excluded from income if the cancellation occurred in a title 11
bankruptcy case, or to the extent you were insolvent just before the cancellation. See the examples in Publication 4681.
How do I know if I was insolvent?
You are insolvent when your total debts exceed the total fair market value of all of your assets. Assets include everything you own,
e.g., your car, house, condominium, furniture, life insurance policies, stocks, other investments, or your pension and other
How should I report the information and items needed to prove insolvency?
Use Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to exclude
canceled debt from income to the extent you were insolvent immediately before the cancellation. You were insolvent to the extent
that your liabilities exceeded the fair market value of your assets immediately before the cancellation.
To claim this exclusion, you must attach Form 982 to your federal income tax return. Check box 1b on Form 982, and, on line 2,
include the smaller of the amount of the debt canceled or the amount by which you were insolvent immediately prior to the
cancellation. You must also reduce your tax attributes in Part II of Form 982.
My car was repossessed and I received a 1099-C; can I exclude this amount on my tax return?
Only if the cancellation happened in a title 11 bankruptcy case, or to the extent you were insolvent just before the cancellation. See
Publication 4681 for examples.
Are there any publications I can read for more information?
(1) Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals) is new and addresses in
a single document the tax consequences of cancellation of debt issues.
(2) See the IRS news release IR-2008-17 with additional questions and answers on IRS.gov.
Building a case for your Loan Modification
Building your Loan Modification case is extremely important. Your job here is to prove to your Lender that
you are worthy of a Loan Modification, and if granted; you will be able to afford the new terms of the loan.
Presenting a well documented case to your Lender can be the difference between getting something and
getting everything you want. Take your time to really make this case as strong as possible.
Let's begin by breaking down the 6 basic elements of building a strong Loan Modification case.
The Loan Modification pack will include the following items:
Fax Cover Letter
Modification Cover Letter
Fax Cover Letter
This is pretty self explanatory. The Idea is to give the Lender all of your personnel information right on top
of the package. It also helps to find its way to the appropriate person in a timely fashion. Lenders tend to
treat faxes that come with a cover letter as more important than those that do not. They simply look like
they are more likely to have something important to say when compared to just a big fax of documents.
FAX COVER SHEET
DATE: January 1, 2009
Contact Name (If you have one)
Loss mitigation Department.
Your Name - Your Address- Your Contact Info - Your Loan number(s)
Number of Pages:
Regarding: Loan Modification Request Please give these documents to the Loss Mitigation Department.
Loan Modification Cover Letter
A well written cover letter helps make your Loan Modification case standout. It shows you are
serious about modifying your loan, and helps the loan mitigator when receiving your package.
Lenders are swamped and overwhelmed with requests for Loan Modifications, and this will
definitely help them navigate through your file with ease. Make sure to include your loan number on
all your Loan Modification documents to make sure the Lender knows which account they are
working on. Making everything precise and clear will almost always expedite your process. Our
sample proposal letters include all supporting documents. Make sure you only send the Lender
exactly what they are asking for (we will show how to find that out later).
Name Address Loan# Date
To whom it may concern;
I am requesting a Loan Modification on Loan number ###########. Attached you will find my Proposal and supporting
documents required to execute this. I have analyzed my current financial picture and determined an appropriate plan
which appears fair for both parties. Currently, I cannot afford to continue paying my mortgage payments as agreed.
You will find this proposal will allow me the ability to make my mortgage payments as agreed by the terms of this
loan. I have always maintained my credit with the highest of value, and ask you assist us in this time of need. We love
our home, and would like to stay in it if possible. Without a Loan Modification to my current Mortgage, I am looking at
imminent foreclose on our home. Below is a loan modification proposal. Please assist me in modifying the terms of
this loan, allowing me to continue to make my financial obligations to you as I had previously agreed.
Current loan amount: $275,000.00
Current Interest Rate: 8.5% Current term: 5/1 Arm
Current Amortization: 30 year Current payment: $2400.97
Years left on loan: 26
New Loan Proposal
New Loan amount: $250,000.00
New Interest Rate: 5.5%
New term: 30 year fixed
New Amortization: 40 years
New Payment: $1549.84
Years left on loan: 40
Enclosed you will find the following supporting documents. Modification Cover Letter Modification Proposal Hardship
Letter Financial worksheets HUD settlement statement Supporting Financial Documents Property valuation assessment
- Zillow printout (or other)
Sincerely, Your name exactly as it appears on your loan.
A hardship letter will paint a picture of your family's current financial position. This is your opportunity to
explain to your Lender the circumstances that caused the hardship and what steps have been taken to
deal with the problem and get you back on track. A compelling and well written Loan Modification
hardship letter tells the Lender whether your family has experienced an "acceptable hardship" and can
assure the bank that if given the chance, the home loan payments will be paid on time moving forward.
Let's take a look at what qualifies as an acceptable hardship? Here is a list of the generally acceptable
Loss of Job or failed Business
Death of spouse
Damage to property
Adjustable rate Mortgage
So, how do you write a convincing Loan Modification hardship letter that is concise, but also tells the
Lender everything they should know about your family's situation? Keep in mind that Lenders are
inundated with frantic homeowners trying to find an affordable financial alternative which would allow them
to keep their home. The Lenders have heard and seen it all, so here are a few more tips for writing a heart-
felt Loan Modification hardship letter, and setting yourself apart from the rest of the pack.
i Do not write a novel, the person reading this needs to do so quickly. Keep it to 1 to 2 page max. First,
describe the hardship and the circumstances surrounding it. Next, explain what changes have been
taken to overcome the hardship. Write the letter from your heart, sharing your feeling and thoughts.
Provide the Lender with a detailed explanation of your plan to get back on track and stay there. Finally,
assure the Lender that you are a responsible homeowner who just needs a second chance. Make sure
they understand how much your home means to you and your family. And very importantly, remember
that it's ok to use foreclosure as a leverage tool! Use the samples below as a guide, but I recommend you
write your own letter and include your personal experiences. No one can tell your story better then you!
Lender Name Lender Address
Dear Sir or Madam:
I have recently been experiencing financial difficulties due to a major increase in my interest rate on my home
After reviewing my current financial situation carefully on the worksheets, and documentation, you will see I no
longer have to capacity to make my mortgage payments based on the original terms of the agreement. I have no
choice but ask you to modify the terms of my mortgage to avoid imminent foreclosure of my home.
Due to the decreasing value of home prices affecting the entire country this year, I currently owe more on my
mortgage than the home is actually worth(25 0,000 owed vs. 200,000 value).Along with increased credit card interest
rates, and my ARM going up again last month to 9.5%, I am in financial trouble that requires your help.
Financial hardships can and do occur. My situation was not based on a choice we had the only part in making. I deeply
appreciate your help in remedying this matter before it gets worse. I take pride in my good credit, and understand the
importance of making good on my financial promises. With your help we can both elude the cost incurred by both of us
as a result of foreclosure.
If you have any questions, or need anything further from me, you can contact me at (800-555-1212.)
I have enclosed my loan modification proposal, hardship letter, all financial worksheets, bank statements, pay stubs, a
recent valuation and or appraisal.
Joe Home Owner
To Whom It May Concern,
I’m asking for your help. Circumstances beyond our control have changed our financial situation. When we bought our
home we were running a small retail operation and a husband thriving in real estate.
Then three years ago our home experienced black mold damage that was remediated incorrectly. The furnace blew
toxins from the mold throughout our house making our family ill. The mold attached to our walls and became Toxic.
We were forced to rent a home while our house was repaired. We spent all of our savings repairing the home last
We are currently in litigation with the remediation company and our home insurer to recoup expenses and health
problems that have arisen from this.
Our home is currently in no condition to sell. Having to disclose the Black Mold to potential buyers eliminates any
possibility of selling in this down market.
If we cannot get assistance we are looking at imminent foreclosure on our dream, and our future.
Your name Your address
Dear Sir or Madam:
I’m asking for your help. Circumstances beyond my control recently caused my income to change.
I was laid off six months ago, and now face increased challenges as a sales rep seeing reduced sales each month as a
result of turbulent economic times. The subsequent loss of my wife’s job and my decline in monthly commissions has
caused us to fall behind on our mortgage payments.
My wife has recently found new employment, and is now earning once again.
Although we have not made our payment for the last 3 months, with your help we are ready to get back to making on
time payments again. We do not however have the resources to come up with the $ X ,000 to cover our 4 months back
payments and fees. Please help by fixing our rate and forgiving our past due amounts on this loan. By allowing us a
fresh start will get us back on track again. Please do not force foreclose on our family home.
We are requesting a loan modification, and ask that you grant our request. By doing so you will eliminate the losses
we shall both incur as a result of an additional foreclosed home that will strain your cash reserves, as well as keep the
dreams and hopes of another American family alive
Please let me know what we can do to work out a loan modification plan that is mutually beneficial to all parties. Our
phone number is 800- 555-1212.
You will find all of the supporting documents included in this.
Calculating your income versus your expenses
You will also be asked to show your income documentation and complete financial statements. This is
also a great way of seeing where all your money goes each month. Take the time to make sure this
worksheet is fully completed with all the correct information! Making sure to fill in all the sections will truly
show you where your money goes. Make sure to consider all and any money spent on miscellaneous
items. This should include all income and expenses less your housing payment to see what money you
have left over at the end of the month to pay your mortgage (make sure to add taxes and Hazard
Insurance because that cannot be negotiated). It's important to make sure that when you are calculating
this amount that you put all of your household expenses on the worksheet. The worksheet includes
common expenses for homeowners but you have other monthly expenses as well. Use the other boxes.
Include your entire household's income. This means that any member in the home which contributes
financially can be added to this amount (not just the individuals on the loan). If you are currently renting
out rooms in your home, make sure to include that income as well. If you make more money than you
claim on your taxes, include it. For example, if you are a bartender and only claim a portion of your daily
tips, show them what you really make. The Lender has no intentions of reporting you to the IRS. If you
have co-signed for a loan that is on your credit report (i.e. student loans, child's car), include that as an
expense along with what the borrower on those loans pays you each month towards the loan. They
payments will offset, but at the same time clear up, any questions the Lender will have if they choose to
run your credit.
Once you have completely entered all of your income and expenses correctly onto the worksheet, you will
be able to see what income is left over for your mortgage payment and your 10% disposable income. By
subtracting your current mortgage payment from the remaining amount, are you negative? If not, how
much excess cash is left each month? The bank is going to use these figures to determine if you qualify
for a Loan Modification and how far they are willing to bend. Now you are ready to begin adjusting those
numbers for use in developing your Loan Modification proposal.
Figure out the payment for your ideal proposal go to www.mortgagecalculator.org to calculate rates and
payments. Enter the numbers that you would love to achieve. For example, if you want to reduce your
rate and balance and put it on a 40 year amortization, see where you end up. How much spending cash
do you have left over with these numbers (disposable income)? When your disposable income amount is
too high, the Lender will counter the offer to a higher rate or deny you all together because you are
financially ok. If that number is too low, they might deny the modification all together. If you have put all
the numbers together and are still tight, you might have to let go of another debt in order to keep your
house. If you have too much excess income after expenses and mortgage payment, then maybe you
need to eat more. This is a tight rope act requiring you really crunch these numbers before making your
final decisions as to your Loan Modification proposal.
When creating and completing your financial worksheet, be as accurate as possible. The Lenders will
most likely ask you to prove your income. Tips and other cash earnings are nj^ to impossible to prove,
but the Lenders will often believe you
within reason (when it makes sense). They will ask for bank statements to prove deposits, but don't let
that scare you. Often time cash never makes it into your accounts, and the Lenders know that. If you are
coming up negative on the income section, then you might need to look at your expenses. What can be
cut out? This is also a great tool when used as a budgeting devise to keep you from overspending in the
future. Are there any other forms of income you might be overlooking (investments, rent received, and
small business)? Start by including all of your expenses on the worksheet and then begin to adjust
accordingly. You must have the ability to make your proposed mortgage payment along with all of your
monthly expenses and have some money remaining (disposable income).
Using this detailed information when attempting a Loan Modification will make you appear as an informed
and well versed homeowner. When they realized that you understand what you are doing, they will
respect you and your request more. And by providing all the supporting documents (i.e. bills, bank
statements, pay stubs, and income docs) ahead of time, will put you in the driver's seat!
Monthly Household Budget
INCOME Actual  OVERVIEW Actual
Wages & Tips (after tax)
Interest Income Total Income
Dividends Total Expenses
Gifts Received NET
Transfer from Savings
Total INCOME 2,000.00
HOME EXPENSES Actual SAVINGS Actual
Mortgage (P&I Only) Emergency Fund
Taxes/Insurance Transfer to Savings
Electricity Retirement (401k, IRA)
Cable/Satellite Total SAVINGS -
Furnishings/Appliances OBLIGATIONS Actual
Lawn/Garden Student Loan
Home Supplies Other Loan
Maintenance Credit Card #1
Improvements Credit Card #2
Other Credit Card #3
Total HOME EXPENSES Alimony/Child Support
DAILY LIVING Actual State/Local Taxes
Groceries Legal Fees
Personal Supplies Other
Clothing Total OBLIGATIONS -
Dining/Eating Out BUSINESS EXPENSE Actual
Dry Cleaning Deductible Expenses
Salon/Barber Non-Deductible Expenses
Discretionary [Name 1] Other
Discretionary [Name 2] Other
Other Total BUSINESS EXPENSE -
Total DAILY LIVING -
CHILDREN Actual Videos/DVDs
School Tuition Rentals
School Lunch Movies/Theater
School Supplies Concerts/Plays
Total CHILDREN - Sports
TRANSPORTATION Actual Toys/Gadgets
Vehicle Payments Other
Fuel Total ENTERTAINMENT -
Repairs PETS Actual
Total TRANSPORTATION - Toys/Supplies
HEALTH Actual Total PETS -
Medicine/Drugs SUBSCRIPTIONS Actual
Health Club Dues Newspaper
Total HEALTH - Club Memberships
INSURANCE Actual Total SUBSCRIPTIONS -
Health VACATION Actual
Total INSURANCE - Rental Car
EDUCATION Actual Other
Music Lessons Total VACATION -
Other MISCELLANEOUS Actual
Total EDUCATION - Bank Fees
CHARITY/GIFTS Actual Other
Gifts Given Other
Charitable Donations Other
Religious Donations Other
Other Total MISCELLANEOUS -
Total CHARITY/GIFTS -
Net Disposable Income Actual
P&I Current Mortgage
Mortgage Payment I can
Preparing a Modification Proposal
Let's put together our proposal to submit to the Lender. This is our chance to make our initial requests to
Below is a sample Modification proposal letter:
Loan Modification Proposal for
Loan Number ##########
Current Existing Balance $250,000.00
Current Market Value / proposed Balance $220.000.00
Proposed reduction in loan Balance $ 30,000.00
Current Interest Rate 8.5%
Proposed Interest Rate Current loan term 4.75% Adjustable Rate
Proposed loan term Fixed Rate
Amortization remaining 27 years
Proposed Amortization 30 years
Current Payment $1,850.00
Proposed Payment $1275.00
Disposable housing income $1,500.00
Preparing your Loan Modification
Package for Submission
Fax Cover letter
Modification Cover Letter
Supporting Income Documents
Get Your Doc’s In A Row! Those Who Are Self Employed!
The following is what your lender requires
to make a decision . You Will Need The Following..
A) A Hardship Letter Explaining What Caused H) A Hardship Letter Explaining What Caused
Your Financial Hardship Your Financial Hardship
B) A Financial Worksheet Showing Your Current I) A Financial Worksheet Showing Your
Monthly Financial Obligations Current Monthly Financial Obligations
C) Two Months Current Paystubs That Verify Your J) 12 Months Current Paystubs That Verify
Current Income (Both Borrowers) Your Current Income (Both Borrowers)
D) Two months Current Bank Statements K) Twelve months Current Bank Statements
E) Tax Returns And Or W-2’s (Business and Personal)
F) A Foreclosure Counseling Certificate Provided L) Two Years Tax Returns
By Your Assigned Counselor M) A Foreclosure Counseling Certificate
G) A Budget Provided By Your Counselor With Provided By Your Assigned Counselor
Suggested Resolution Options N) A Budget Provided By Your Counselor With
Suggested Resolution Options
Getting all of these documents in order ahead of time is crucial to your success. Once you have compiled
all this information, you are ready to begin the negotiations process with your Lender. Go back one more
time and make sure your proposal includes all of the necessary items needed for you to be able to make
this payment in the years to come. This is a once in a life time opportunity that you must put your best
foot forward with into order to insure your success! Make sure not to appear greedy in the eyes of the
Lender. No one wants to help someone who they feel are trying to take advantage of them. This is a great
time to get the advice of an attorney, as I am not acting as legal support but, rather as a knowledgeable
source for valuable information. And remember, always be friendly and nice. The people who you are
negotiating with can often have a say in the decision making process. You will always standout by
showing your appreciation for the time and energy they spend on you. That little extra effort can go a long
Identifying who you are Negotiating With?
Who are we negotiating with?
Where do you fax our proposal?
How do we find this information?
The HUD, note, or deed of trust will tell you who you are to negotiate with. You need to find your loan
closing package from your purchase or last refinance. Your last mortgage payment coupon should also
have this information. Either one will show who the lien holder is. Often there is a servicing number
listed, while many Lenders information can be found by searching Google. Once established, pick up the
phone and call the Lender. Don't be afraid to do this! Contacting the Lender can be a tricky process.
Often you find your way into a sea of automated voicemails. You must be patient navigating your way
through the system. I find that you're most likely to get through to someone at either by selecting an
option which is related to the Lender selling you something, or by selecting an option which directs you
to making a payment. Either way, the key is to get through to a human!
Once connected, explain to them you are trying to get through to a person in their loss mitigation
department. They may not even know what that is. If they don't know, ask for someone in their
collections department. At least you will be on the right track. At many Lenders, to get through to the
loss mitigation, you must first make it through their collections department. Explain to them your situation
in the nicest way possible. Ask them to transfer you to someone who can assist you in modifying the
terms of your loan. You may not have any luck the first time. Callback! Each time you will end up with a
different person, with the goal being, you will find your way through to the right person.
Get as much information as you can on that first contact call. Try to pin down a direct phone number, fax
number and good address for that department. Build a relationship with the person you are working with
over the phone and ask them if they personally will be able to assist you in this process. Having a good
contact on the inside can mean everything in this process. This will come in handy for future calls and
correspondence. Ask the loan mitigation representative to give you their protocol and forms for submitting
a proposal for Loan Modification. This is also great time to ask what supporting documents you will need
to include from your list. Make sure to be accurate as to what to send. If they do not request it, don't send
it. Sometimes giving the Lender too much can kill your deal. Once you have established who you are
negotiating with, where they are located, how to contact them, and the appropriate documents you
will need to successfully negotiate this transaction, you are ready to do so! Remember to be as polite
and well-mannered as possible while on the phone. Do not let the bank's representative change your
friendly disposition regardless of their demeanor on the phone. These people are getting hassled all
day, and your soft friendly voice could be exactly what they need.
Negotiating with your Lender
This is where the process can get tricky and frustrating. You must be ready and willing to fight your way
through to the loss mitigation department at the Lender.
Understand that a Loan Modification is a negotiation between you (or your modification company) and
your bank. You are presenting them with a proposal supported by documented income and expenses. In
the financial worksheet that you have completed you are showing the Lender what your overall entire
household income is after taxes. You will be calculating your monthly expenses, both credit debt as well
as day to day expenses, into this calculation. Be aware that day to day expenses are difficult to
document. Overestimating these expenses on your worksheet will increase spending cash. By using the
financial worksheet you will be able to budget for your mortgage payment. It will allow you to calculate your
monthly household income and compare it to all expenses excluding your mortgage. Your modified
monthly mortgage payment (amount you can afford) is achieved from calculating the difference between
your total after tax income versus your total expenses. Don't forget to leave yourself reasonable
disposable income for incidentals (15%) when making your modification proposal to the bank.
Once you have faxed your entire package to the Lender, wait the appropriate timeframe requested then
begin attempting to reach your contact at the Lenders loss mitigation department. Once the have received
your request your loan should be placed in a freeze status. This will stop additional fees and penalties for
accruing and allow you to slow down foreclosure proceedings as well.
Here are our tips for proper negotiations:
Always be kind, friendly and courteous.
Once your contact is established at the lender, get as much information from then as
possible (phone, fax, address, what they require, and all time frames involved)
Make sure to ask for everything you want the first time. There is no second chance here. Know your
options, and review everything ahead of time.
Be patient: Some lose mitigation departments take 3-4 weeks just to get to your account. Then wait
additional weeks for a response. Some banks are taking 120 days.
Build a relationship with the agent assigned to your loan modification. Making them your friend allows you
to chit chat with them over what tough times you have faced.
Just like negotiating a car purchase, you need to go into the process with clearly defined parameters of
what will be acceptable new terms. Don't let the lender decide what payment you can afford, you show
If you don't like the banks first offer, don't except it. Submit a second proposal attempting to find a
Make your hardship letter a heartfelt explanation of your trying times, finishing with the reasons why you
deserve and appreciate this second chance.
Be appreciative, this is a once in a life time opportunity, making the lender know you are not taking this
second change lightly is very important.
Don't be afraid to threaten foreclosure. It works!!! No one wants your home more then you, now prove it to
The lender wants to know why you can make your payments with there help. Don't paint a picture of total
disarray or you may seem to far gone to help.
Always ask for a forbearance period between the modification period and the new first payment. Save
these additional funds for future financial short comings.
Persistence is good, but remember the relationship building part. If your agent says it will take 2 weeks to
get an answer, tell them "ok great I will call you on the June 14"; Two weeks later. This gives them the idea
you are motivated to negotiate, and still not drive them crazy.
If it takes every possible modification option available to allow you to actual make your payment each
month, then go for it!!
Support, Support, Support. If you claim it, be ready to prove it The better you document your case
upfront, the less likely the lender is to ask for more information.
And lastly remember that this process is what companies charge thousands of dollars to do. It's not easy,
and can be time consuming and frustrating. But if you persevere and achieve your goal of a second
change through loan modification, know you can accomplish anything!!
Finalizing the Process
Congratulations! Many people before you have fallen in the process. Once the decision is returned from
the Lender, you'll have a clear set of new terms that you can either choose to accept or decline. Make
your decision wisely, as another modification proposal attempt will add time and the possible decision of
your request. If you do chose to decline the lender offer, you need to remedy your existing proposal to find
some form of accommodations for the Lender. Look at what area's they are willing to change as well as
the area's they declined modification towards. Go back to your main goals and determine if your primary
focus areas for modification were achieved. If not, resubmit your second request with the Lender.
If you like the Lenders proposal, and they have agreed to most or all of your terms, then sign and notarize
the proposal right away and mail back to the Lender. The Lender will often give you a date by which you
must sign and return the agreement. If you fail to return the agreement by this date, it may cancel your
right to a Loan Modification.
If you have completed this section successfully then you are well on your way to financial freedom!
We hope this kit gives you all the tools you need to stay on the path of financial freedom.
Again, congratulations and great job on your success!!
Options when a Loan Modification Fails
So, either you did not have any luck negotiating your Loan Modification, or you already know this may be
a better option for you. Regardless of which, negotiating a short sale or deed in lieu will be no different
than a Loan Modification, just a different outcome. Below are both options. The process needs the same
diligence as used when working with the Lenders. Being organized, educated, and prepared are the most
important factors to your success!
Short sales are agreements between the Lender and the property owner that allows a home to be sold for
less than the amount owed. The borrower must prove to the Lender that the value is no longer there. The
Lender makes the final decision in approving a short sale. Potential buyers need to understand a short-
sale transaction before entering any purchase contract. While a buyer and seller may agree on the price,
it's up to the Lender to accept or deny the offer. It's a potential option based on the value of property, the
balance owed, and the estimated resale time frame. The Lender often has a minimum value they will take
in the loan sale which is non-negotiable. When the sale proceeds do not satisfy the remaining balance,
the after-said balance is forgiven. The credit is then reported as "satisfied" for "less than full" amount. This
is considered by most as much less damaging to one's credit, although it can often be as offensive to
prospective future Lenders.
Although short sales have been around for a very long time, they have become extremely common
again because of the astronomical increase in foreclosures. While short sales are not an easy way out,
Lenders are becoming more willing to negotiate with borrowers who are currently behind on their
Upfront, the Lender will want a hardship letter from the seller, a signed real estate contract between a
buyer and seller, and an estimated settlement date. This should be provided alongside a full set of
financial documents from the homeowner, a listing agreement showing that the property has been listed
for some time, repair estimates for any work need to be completed to the property, and proof of funds if
it's a cash sale. For new financing, a mortgage commitment letter will be required which pre-qualifies the
new borrower. The Lender may choose to counteroffer your request and your negotiation continues until
you reach a mutual agreement. The important thing to remember is that the last thing a Lender wants is
to foreclose on a home. The Lenders are not trying to get into the real-estate business. If a Lender
forecloses on a home, they must prepare it for resale by getting it cleaned up, painted, and at times,
perform major repairs to make the home sellable. Then the Lender must get it listed on the market for
sale (with or without a realtor). Lenders don't want to deal with vandalism and theft which is so commonly
associated with these vacant foreclosed homes, not to mention, they don't want to have to maintain the
property while it sits idle waiting for a buyer.
Many banks are not prepared and not ready to begin accommodating so many short sales requests. Real
estate agents are also facing many challenges with their clients. Realtors need to build strong relationship
with the bank or Lender on any short sales in process. Establishing a good relationship with the loss
mitigator from the bank will often determine whether your deal goes through or not. Third party loss
mitigation companies exist, and most brokers will find that unless the entirety of their inventory is short sale
capable, it is easier and much more productive to hand the negotiations off to a firm employs legal and
financial experts with well-developed relationships in bank loss mitigation. These types of companies will
usually charge around 2%-3% of the sale price for their services, and often agree to work out discounts
for large amounts of homes.
A short sale can benefit everyone involved in the transaction. Financially troubled homeowners save the
embarrassment and marred credit associated with a foreclosure (remember short sales are still looked on
from many lending institutions as a foreclosure). Investors and entry-level buyers have the opportunity to
buy a home below market value. Lenders avoid the hassle and expense of seizing a home and putting it
up for auction. Short sales can occur before a home goes to foreclosure or during the foreclosure process.
Deed in Lieu
A deed in lieu is a process whereby the borrower, having failed to satisfy their loan obligation, voluntarily
hands over the property to the Lender. The Lender then sells the property in an attempt to recover some
or the entire amount owed on the loan. This will have a negative impact on your credit, but the borrower is
removed from any future financial obligation from this property.
What is the actual process?
The process involves the execution of legal documents including an Agreement in Lieu of Foreclosure and
either a Quit Claim Deed, a Warranty Deed, or a Grant Deed. The Agreement lays out all of the terms and
conditions of the deed in lieu, and must be signed by the borrower and the Lender. The deed conveys
legal ownership of the property to the Lender. The Lender will then mark the borrower's note as being
"paid" and then provides the borrower with two documents - one stating that the debt is canceled and the
other referring to the waiver of the Lender's right to a deficiency judgment (the Lender's right to seek, in
court, payment of any difference between the balance owed on the loan and the amount recovered from
the property sale).
The Agreement in Lieu of Foreclosure is executed through an escrow company which receives all
documents in the transaction, including the borrower's note (marked as "paid") from the Lender. The
escrow company then records the deed to transfer legal ownership of the mortgaged property and sends
the note to the borrower. The borrower is thus released from any further liability for the mortgage
Is the deed in lieu of foreclosure a taxable event?
Under the Mortgage Debt Forgiveness Tax Relief Act, which is in effect until the end of 2009, the borrower
need not pay tax on the canceled debt (any unpaid loan balance which was forgiven by the Lender)
resulting from a deed in lieu of foreclosure. Not every state goes along with this tax exemption, though.
One interesting point to note is, even though the Lender may not collect a deficiency, the borrower, at his
option, may pay towards the unpaid debt in order to avoid a negative impact on his credit report. These
extra payments serve to reduce the amount of unpaid debt, that is, the canceled debt which is the basis of
the tax liability. Seeking legal advice is always advised in these situations. We always recommend
homeowners attempt to modify their loan prior attempting either a short sale or deed in lieu.
There are several entities that provide support in the areas of foreclosure prevention and loan
modifications. Many charge upfront fees that may be more than you can afford. The sources listed
below, have been found to be trusted sources that provide necessary answers and or online
technology to assist in your loan modification process. As an educational resource, we do not
provide legal or accounting advice. However, we have found these to be legitimate sources that
provide information, forms, or technology that will benefit you the homeowner in efforts to save a
home from unaffordable payments. The website URL’s are listed below.
This Government sponsored website operated by the Department of Housing and Urban
Development will provide you with many resources relating to foreclosure prevention and prospective
loan modification information.
This website provides many resources relevant to foreclosure prevention, loan modifications, and
short sales of real property. LoanResolve Technologies is a very affordable fee based website that
guides you through correct compilation of required data and documentation and electronically submits
your request directly to your lender(s). One of the key features is that your documentation is
immediately available for viewing by your lender(s) and all your transactions are logged and time
stamped to protect you should your lender fail to respond in a timely manner. This can be used as a
burden of proof should you ever end up in foreclosure court.
This non-profit website provides many resources relevant to foreclosure prevention, loan
modifications, and refinance. Hope Now is a website that guides you through information that may
assist your efforts when working with a non-profit counseling agency. This website is mostly
informational and provides little direct interaction required to immediately resolve your mortgage
This non-profit website provides many resources relevant to foreclosure prevention, debt
management , loan modifications, loan workouts, and credit counseling. National Foundation For
Debt Management website will guide you toward information and services provided by a non-profit
counseling agency that resolve both mortgage and credit related issues. This organization also
provides one on one counseling. This website is mostly informational and provides toll free telephone
numbers for direct interaction by phone or internet to resolve your mortgage issues.
Glossary of Terms
Abandonment - A situation in which a homeowner leaves a home without any intention of returning. If
there is a mortgage on the property a foreclosure will occur. Many times these are called "key tosses",
where the keys to the house are left inside or mailed to the mortgage Lender.
Auction - The process of selling a property the highest bidder. In the case of foreclosures, there may
be starting price, which is the lowest amount the Lender will accept. In an Absolute Auction of a
foreclosure, there is no minimum price.
Bill of Complaint - The initial paperwork that is filed in many states to the foreclosure process.
Compromise Sale - A VA property sale in which the amount on the VA loan is greater than the home's
sale price. The VA may cover the loss.
Deed in Lieu of Foreclosure - Instead of waiting until the Lender forces the sale of a house in the
foreclosure process, the borrower deeds the property to the Lender.
Deed of Trust - A deed of trust is a regarded a three-party mortgage arrangement between the
borrower, the Lender and a trustee. If the borrower fails to pay his mortgage, the trustee is
preauthorized by the borrower to sell the house and apply the sales proceeds to pay off what remains
unpaid on the loan secured by the deed of trust of give the deed to the Lender in exchange for
cancellation of some or all of the borrower's debt.
Deficiency - Money a borrower who has lost real estate in foreclosure still owes to the Lender
because the foreclosure sale failed to generate enough from the sale price of the property to pay off
Entry and Possession - A foreclosure method used in some states which the Lender either peacefully
or by court order takes possession of the property from the borrower. This is a last resort in many
Execution Sale - The sale of a foreclosed property by a sheriff pursuant to court orders
Forbearance - Prior to foreclosing on a property, a Lender may agree to accept lower payments than
originally agreed upon or added missed payments to the end of loan to help a borrower avoid
foreclosure. This is normally handled by the
Lender's Loss Mitigation Department
Hard Money - Lenders for persons who cannot acquire funds through usual sources. Their interest
rates are above the average. Some foreclosure investors who fix and flip acquire funds from these
sources. There are substantial cost associated with these types of loans
Holder in Due Course - This legal document holds that a person or entity that obtains a not without
notice of any borrower defenses to its enforcement may enforce payment of that note in a court
despite any borrower defense or other reason for not paying.
I Judicial Foreclosure - A court-ordered foreclosure. The Lender must first file and win a lawsuit to
Junior Lien holder - A holder of a right to foreclose on a property that is inferior to the first lien holder.
Lis Pendens - A recorded notice of a lawsuit in process, which may change the title of property. It is
the first indication of pending foreclosure in some states.
Liquidating- A plan by which a borrower repays missed payments to a Lender over time. Again this in
lieu of a foreclosure. This handled by the Lender's Loss Mitigation Department.
Loan Modification - A procedure whereby a loans payment plan is altered due to the hardship of the
borrower. This can include the rate, term and monthly payment amounts. This is handled by the
Lender's Loss Mitigation Department.
Loss Mitigation Department - This is the Lenders department to oversee delinquency of loans prior to
foreclosure. See Forbearance, Loan Modification, Relief/Recasting and Short Payoffs/Short Sales.
Mechanic's Lien - A lien allowed by law upon a building or other improvement upon land, as a security
for the payment of labor done and materials furnished for improvement. Many contractors have
acquired properties through this legal mechanism.
Mortgage Lien - The right of a mortgage Lender to sell a mortgaged property is the borrower fails to
repay the loan as agreed.
NOD - A Notice Of Default is issued to the home-owner making them aware of the potential future
status of their home
Nonjudicial Foreclosure - A foreclosure on a mortgage without filing a lawsuit.
Many states foreclose on properties in this way.
Power of Sale Clause - The clause in a deed of trust or mortgage, by which the borrower
preauthorizes the sale of a house to pay off the balance on a loan in the event of the borrower's
default. Usually the trustee will hold the sale. In some states it is done by the sheriffs office.
Relief/Recasting - Various loans will offer various types of special payment plans to assist struggling
borrowers prior to them going into foreclosure. See Loss Mitigation Departments.
REO - The department that holds and disposes of foreclosure property within a lending institution,
Short Payoffs/Short Sales - The sale of property prior to foreclosure at a reduced amount. See Loss
Strict Foreclosure - A legal premise in some states that the Lender owns a property and may simply
evict the borrower for nonpayment and gain full and complete title free of the borrower's right to
redeem after the prescribed waiting period has passed.
Trustee's Deed - A type of deed issued to the buyer at a trustee foreclosure sale.
Warranty Deed - A deed in which the seller guarantees or warrants that good title can be traced back
in time when the land was owned by country.