Dubiln Packard

Foreclosure

Everything you need to know about

Foreclosure

  • Foreclosure Defense
  • Loan Modification

and your options to purchase, refinance, sell, liquidate, surrender, or foreclose your property in the State of New Jersey.

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Will I Qualify For a Loan Modification

will i qualify for a loan modificationYou Want To Qualify For A Loan Modification: How Will You Know If You Qualify?

To Qualify for a loan modification can be frustrating but wouldn’t it be helpful to know if you qualify right now?  There is a simple rule of thumb that you can use.  Compare your income to your new estimated monthly payment after a loan modification.  This will let you know if the bank thinks you can afford the monthly payments.

How Do You Know If You Can Afford The Monthly Payments?

To know whether or not you can afford the monthly payments, you must pass an income test. You must have the correct ratio of income to mortgage payments.

If you cannot pass the income test, and cannot afford the monthly payments, the only thing you can do to fix this is by adjusting your income.

 

How Can I Increase My Income To Qualify For A Loan Modification?

  1. Look for a second job to supplement your income.
  2. Rent out a room in your house.
  3. Encourage your kids to contribute to the household.

For More Information About Loan Modifications, See My Complete Article:

Read our post: How To Get A Loan Modification. 

Good Luck!

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Two Biggest Reasons People Fail To Get A Loan Modification

loan modification frustrationDid you fail to get a loan modification?  Here are the Two Biggest Reasons People Don’t Get Loan Modifications and how to avoid them.

Reason 1. The single biggest reason people fail to get a loan modification is: they don’t submit all of the documents requested. You must submit all of the documents requested.

Reason 2. The second biggest reason people fail to get a loan modification is: they’re not submitting the documents in a format that the bank accepts; they are very specific in the way that they require you to send in documents.

Don’t Fall Into The Trap.

 

Don’t want to fail to get a loan modification?  Don’t make these two mistakes.

We suggest you submit everything at one time and don’t leave anything out to submit later.  Also, when the bank advises you that something is missing or outdated, submit what they ask for right away – don’t wait.  This will save you an enormous amount of aggravation and frustration.  Most, if not all of the documents the bank is requesting must be the most up-to-date version of the document that is available.  If it is June and the bank asks for the 3 most recent bank statements, submit statements for April, May and June rather than March, April, and May.

For More Information.

To find out more about how to get a loan modification, read our post: How To Get A Loan Modification. 

Good Luck!

 

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How To Get A Loan Modification

How To Get A Loan ModificationTrying to get a loan modification can be very frustrating.

So many people we talk to tell us they have been trying for months to get a loan modification…only to get the runaround from their lender.

But First, What Is A Loan Modification?

A loan modification is changing the terms of your existing loan with your existing lender.  By the way, it is not a “re-modification.”  What terms?  First, if you are behind on your payments – we call those missed payments the “arrears” – you have to catch up.  In a loan modification, the arrears are added to the principal balance.  Then, you get a new – hopefully lower – interest rate and then the number of years is reset to zero and now you have a new 30 or 40 year loan with a new principal balance and a new internet rate.  Hopefully, all of that translates into a new monthly payment you can afford.

That last part is important.  “…you can afford.”  If you can’t afford to make the payments, you won’t qualify for a loan modification. If you want to find out if you qualify for a loan modification, read our post: Do I Qualify For A Home Loan Modification?

How Do You Know If You Can Afford The Monthly Payments?

There is a simple rule of thumb to help you know right away whether or not you will qualify for a loan modification.  Take your gross monthly income and multiply by 0.30.  That’s 30% of your monthly gross income.  That number is where your lender likes to see your monthly payment. If you are self-employed, there are special considerations. If you want to find out if you qualify for a loan modification if you’re self-employed, read our post: Will I Qualify For A Modification If I Am Self-Employed? 

If I Don’t Qualify, Where Can I Get More Income?

  1. Get a second job.
  2. Rent out a room.
  3. Get your kids to contribute.

Ok, I Think I Can Qualify.  Now What?

All of the banks use pretty much the same forms.  Go to your bank’s website and search for the form.  Or, you can contact your bank directly and have them send you the package of forms. Complete the forms and attach all of the documents requested by the bank.

The Biggest Reason People Don’t Get Loan Modifications.

The single biggest reason people don’t get a loan modification is: they don’t submit all of the documents requested.  You must submit all of the documents requested.

Be Patient:

It may take 3-6 months of calls, faxes, emails, letters etc. to get help before you get relief.

Good Luck!

 

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Don’t Use Your 401(k) or IRA to pay bills!!

don't use 401(k) to pay billsYou may think your loss or reduction of income is only temporary – and hopefully you are right.  But there are better ways to handle bills than to use your 401(k) or IRA.  Don’t do it.

 

This is really a lesson in waiting too long for help.

So many people over the last several years, mostly people in their late 40’s or early 50’s, come to me for help with a foreclosure or wanting more information about seeking the help of bankruptcy after struggling for a couple of years to make ends meet during times of unemployment or underemployment.  In many of those situations, particularly with families where one or both wage earners had decent jobs and had accumulated a nice amount of retirement savings, using a 401(k) or IRA to pay bills can be extremely painful.

I Had A Great Job and Have Years Of Experience.  I’ll Find Something Just Like I Had Before. In today’s world of employment, the skills necessary to compete have changed drastically and seemingly overnight.  Many people in their late 40’s and 50’s, although they have tons of experience in their careers and have been paid well for it, find they just are not what employers today are looking for.  But, it takes sending hundreds of resumes and going on some interviews to find this out.  In the meantime, because you have been trained to do the right thing, you may make some bad choices in trying to pay bills during this period of time.

I Want To Do The Right Thing.  The right thing means taking care of yourself and your family now and in the future.  You worked hard to save for retirement and if you are in your 40’s or 50’s, it is going to be next to impossible to replace the savings you had if you use it to pay bills that can be handled a better way.  Bills are coming due and you want to make payments.  In fact, many people will put everyday expenses on high interest credit cards, even open one or two new accounts to tap into even more credit.  Others will use savings to pay the mortgage and then to pay the credit card bills.  And, some, after savings are depleted will raid their retirement savings to make ends meet.

Why Not To Use Your 401(k) or IRA to pay bills!!

Retirement savings is protected in bankruptcy.  Yes, I know, you are not thinking about bankruptcy right now and never want to, but bankruptcy is one of the most-used tools for people to recover from a loss of income and save a home from foreclosure.

Focus on the Secured Debts Not Unsecured Debts.  You should distinguish between secured and unsecured debts.  Secured debts debts whose payments are secured by your assets such as your home.  Unsecured debts mean the creditor has no recourse other than money to be paid.  You should make careful use of this distinction and focus on your secured debts.

Paying Credit Cards is The Wrong Choice.  Credit card debt is unsecured debt and in a bankruptcy, unsecured creditors get paid very little or perhaps nothig.  This means you can better use your now limited resources to save your home from foreclosure rather than keep your credit cards current and the phone ringing from debt collectors.

Don’t Pay Your Second Mortgage.  I hear it all the time from a family in foreclosure on their first mortgage, “I have been paying my second mortgage.”  It very well may be the case that your second mortgage can be reduced or eliminated while still saving your home from foreclosure.  In a Chapter 13 bankruptcy, it may be possible to “strip” a second mortgage turning it into an unsecured debt and then paying little or nothing toward it.  Sometimes, this is the difference between getting a loan modification and not getting one.

There are severe penalties to taking early withdrawals from your 401(k) and IRA.

To make matters worse, if you do choose to use your 401(k) or IRA to pay bills, there are severe penalties to pay when you do your taxes that year.  So, not only are you paying bills you may not need to, and you are losing the savings you worked so hard for in the first place, now you have to pay a big penalty when you take an early distribution from your 401(k) or IRA. And, don’t forget you now have to pay income tax in the funds you are withdrawing since it was put into the account ta-free at that time.

Know Your Rights Before You Use Your 401(k) and IRA to pay bills.

Do the best you can do with the resources you have but do not use your retirement savings.  The government protects your retirement savings because it recognizes the difficulty you are going to have in the future if you deplete it now.  As you can see here, there are a number of things you may not have known about your retirement savings. Given the protections available to you, the heavy IRS penalties and tax consequences, and perhaps most importantly, your ability to replace the retirement savings later, using your 401(k) or IRA to pay bills is a very wrong thing to do.

 

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Do I Have To Pay Income Tax After A Principal Reduction?

pay tax after a principal reductionPrincipal reduction is the Holy Grail of loan modifications but they are just so hard to get. If you are lucky enough to have principal reduction included as part of a loan modification, you may have to pay income tax on the amount of the principal reduction. Here’s Why….

 

Do You Have To Pay Income Tax After A Principal Reduction?

Just like a homeowner has to pay income tax on the amount of debt that was forgiven after a short sale, the same applies when the lender reduces the amount of the debt owed through a loan modification that includes a principal reduction.

IRS Publication 4681 provides all of the details.

The IRS treats cancelled or forgiven debt as income.  There are some exceptions.  For example: if you are insolvent or if you file for bankruptcy.  These are the two most common exceptions that apply to people in foreclosure. You may need the assistance of your tax preparer or accountant but take a look at IRS Publication 4681 which provides guidance on canceled debts.

Principal Reduction is Cancelled Debt.

In Publication 4681, the IRS clearly considers principal reduction as cancelled debt.  If you were given a loan that has a principal balance of say $400,000 and the lender agrees to modify your loan to a balance of $300,000, the lender cancelled $100,000 worth of debt and you may owe tax on that amount.

There may be an exception that applies to you.

Insolvency.  In Publication 4681, the IRS provides: Do not include a canceled debt in income to the extent that you were insolvent immediately before the cancellation. You were insolvent immediately before the cancellation to the extent that the total of all of your liabilities was more than the fair market value (FMV) of all of your assets immediately before the cancellation. For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account). Liabilities include: The entire amount of recourse debts, the amount of nonrecourse debt that is not in excess of the FMV of the property that is security for the debt, and, the amount of nonrecourse debt in excess of the FMV of the property subject to the nonrecourse debt to the extent nonrecourse debt in excess of the FMV of the property subject to the debt is forgiven.

Bankruptcy. In Publication 4681, the IRS provides: Debt canceled in a title 11 bankruptcy case is not included in your income. A title 11 bank- ruptcy case is a case under title 11 of the United States Code (including all chapters in title 11 such as chapters 7, 11, and 13), but only if the debtor is under the jurisdiction of the court and the cancellation of the debt is granted by the court or occurs as a result of a plan approved by the court.

Knowing where you stand with the IRS and whether or not you are going to have to pay income tax after a principal reduction is an important part of understanding your options when in foreclosure or trying to obtain a mortgage loan modification.