Loan Modifications, Short sales and Deeds in Lieu (DIL) are the main types of loss mitigation techniques that lenders use when borrowers are in default and in turn facing a potential foreclosure. They are considered “pre-foreclosure” measures the banks use to mitigate their losses and help the borrowers get rid of the house at the same time. Loan Modifications are the precursor to short sales and DILs. A short sale means that the borrower/seller is unable to pay back the full balance owed on the mortgage as one would do in a traditional sale (e.g. short payoff).
Generally, an individual is in default when he/she is at least 30 days behind on the mortgage payment. As a result, the lender can and may start to initiate foreclosure proceedings. Thankfully by this point, lenders are still willing to work with borrowers who would like to either catch up their payments or look into some form of loss mitigation. Lenders typically first run the borrower’s file through a loan modification plan to see if they are eligible for discounted monthly payments. A successful loan mod will reduce the borrower’s monthly payment, but can result in adding a secondary mortgage on title. After the loan modification process, a lender may also be willing to consider a short sale.
In short sale scenarios, lenders require the same hardships and financial documentation as they do in a loan modification. The lender also requires the home to be listed for sale. The lenders go through a very extensive review of the borrowers’ hardship and financials to determine if the file meets the short sale criteria. If so, the lender will order an appraisal on the seller side to determine the fair market value of the home. This is the key number that is used to determine what type of proceeds the lender is requiring. Not any offer will be accepted. There are many more intricacies involved in successfully processing and negotiating a short sale, but if the packet is complete, and the offer is high enough, a lender will typically issue an approval at that point. So what happens if the seller never receives a high enough offer?
DILs are sometimes viewed as an option B whereas short sales are option A if the property is to be sold. If a borrower navigates most of the short sale process but is not able to obtain a high enough offer, most of the time, the lender would then move the file into a deed in lieu status. The main difference between a short sale and DIL is that no traditional closing or settlement takes place. Rather, the borrower relinquishes their rights to the home in return for a release of their obligation to repay the mortgage (ideally). In the past there was a “Cash to Keys” program that was essentially a DIL for very specific loan types.
One main takeaway for all three of these situations is to recognize the general timing. Lenders typically initiate the loan modification process before the short sale which is the precursor to a DIL. Though these loss mitigation techniques are all still used by servicers and lenders today, there are very strict requirements to complete each one based on investor and servicer guidelines.
If you or someone you know needs further assistance with real estate law or a short sale in Virginia, please click the “Schedule a Consult” link above and a receptionist will assist in connecting you with a real estate attorney. Hanger Law serves the following cities and counties in the greater Hampton Roads and Richmond areas: Virginia Beach, Chesapeake, Norfolk, Portsmouth, Suffolk, Hampton, Newport News, Yorktown, Seaford, Poquoson, Williamsburg, James City County, Isle of Wight County, Smithfield, New Kent County, Toano, Gloucester, Hayes, Richmond, Henrico County, Mechanicsville, Ashland, Hanover, Midlothian, and Chesterfield County.
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