It is common for conventional loans to be sold on the Secondary Market resulting in a borrower paying one or more lenders during the life of a loan. Because these investors have vested interests in the loan, they may be influential in the servicer's decision regarding workout solutions.

Veterans Administration

When considering a workout solution for VA loans, borrowers should be aware they might lose their VA eligibility if a compromise sale, Deed-in-lieu, or Foreclosure is completed. The exception is when VA executes a release of liability, or the deficiency is paid in full.

Contact your local VA, as they may be aware of community or government assistance programs willing to help borrowers in financial difficulty.

Federal Housing Administration

FHA actively encourages lenders to mitigate solutions with the purpose of keeping borrowers in their homes and the cost of foreclosures at a minimum. FHA provides lenders with a monetary incentive when a lender works out a solution with a borrower.

Second Mortgages

Second mortgages are liens recorded behind the first mortgage. All workout options given in this handout apply to secondary liens also. If you are delinquent on a second mortgage and unable to reach an acceptable solution, this lender may foreclose. If so, this lender is then responsible for keeping the first mortgage current. If the foreclosure process is completed and there is a deficiency balance remaining on the second, the mortgagee may not collect it in states that allow non-judicial foreclosure.

However, the second mortgage can become an unsecured loan, and therefore collectable, under the following combination of circumstances:

• The first mortgage is delinquent.
• The holder of the first forecloses.
• There is not enough money after the auction to cure the second.

The holder of the "second" then has access to the normal court process for collecting the deficiency as unsecured debt: lawsuit, judgment, wage garnishment.

In the case of a short sale, a second note holder may consider a settlement or reaffirmation of the loan because he knows his risk of loss is high.

Title I home improvement loans have different restrictions depending on the type of first mortgage:

• If the first is an FHA loan, the Title I loan must be treated differently when a pre-foreclosure sale occurs. They may accept $2,000 to settle, or they may want to reaffirm as an unsecured note.
• If the first mortgage is a conventional or VA loan, Title I may require as much as 50% of the balance owing up front and carry back an unsecured loan on the remaining 50%.

• 2nd lender has the ability to stop a short sale.
• 2nd lender may accept partial repayment (offer in compromise).
• 2nd lender may agree to rewrite note as unsecured loan.
• 2nd lender may pursue judgement and garnish wages.

• They must keep the 1st mortgage current.
• If foreclosure is completed they must pay 1st lender before paying any monies to themselves.
• They cannot pursue deficiency balance, if any.

Tax Consequences of Foreclosures/Short Sales

It is important to remember that when a homeowner must utilize the short sale, deed--in-lieu option, or a foreclosure takes place, the IRS requires all lenders to send a 1099 Income Earnings Statement to all borrowers on the note for any deficiency balance (forgiveness of debt according to the IRS) in excess of $600. This must be reported on the borrower's tax returns as income and taxes may be assessed. The exception would be for a purchase money loan (an original loan when the house was purchased, and no refinance has taken place), or when insolvency can be proven and the IRS determines the tax liability should be waived or lowered. In either case, a CPA knowledgeable in short sales and foreclosures is essential.

Credit Report Implications

The impact of delinquent mortgage payments can be devastating on a credit report, but until it happens, the full extent is unknown. Most credit grantors rely on credit reports to assess an individual's bill paying reliability. Employers and insurance companies also look at past credit history to evaluate how we handle our finances. Payment histories are reported for seven years unless it is a matter of public record, such as a judgment, which remains on the credit file for 10 years. There are levels of severity, but how a future lender views your current situation depends upon how well you documented the hardship, how you have overcome it, and what other compensating factors you now have to offset the derogatory credit history.

Even if you are successful in keeping your home, your credit report will probably show 30, 60, 90-day lates by your lender. You may also have credit card lates during the same time period. These will stay on for seven years. If you file a Chapter 13 bankruptcy, and successfully complete it, it will also show for seven years from the date of filing. If it is not completed, it will stay on your credit report for 10 years the same as a Chapter 7 bankruptcy.

If you sell your home, the above lates, if any, will stay on your credit report for the same time period. A short sale may or may not show on your credit report but is generally not considered very harmful since you took positive steps to remedy your situation.

A foreclosure is probably the worst rating that can appear on a credit report. A deed-in-lieu of foreclosure is only slightly better. Both will stay on your credit report for seven years. You usually must wait about three to four years before buying another home at competitive interest rates.

Reestablishing a good credit history is imperative. This can be done with an excellent payment history on a new credit card, timely utility payments, and/or satisfactory rental payment records. If you have trouble obtaining an unsecured credit card, you may seek out a secured card.

Finally, it is a good idea to write a 100 word or less explanation, called a Consumer Statement, explaining the hardship to submit to the credit bureaus to include in your credit file. This explanation will remain as long as the items being explained show on the credit report.

IMPORTANT: Be sure to keep a copy of your hardship letter with your payment records, since the specific details of the situation are sometimes difficult to remember after a few years.

The California Non-Judicial Foreclosure Process