Are loan modifications a good option if I am granted one? Is the HAMP Program a wise decision?
First, a loan modification does not reduce the balance (principal) on the loan. Best case scenario, the bank waives the accrued interest on the loan. If you hear, “I got a principal reduction on my mortgage from my bank,” it usually means that a portion of the loan balance is now a silent second which will need to be paid at the time of sale of the property or as a balloon payment at the end of the loan. Think about this: the market stabilizes, property values start slowly rising, you sell your home in 10 years thinking that you have a little equity and boom — a $50,000 balloon payment is slapped on the condition of sale. You’re in the same position or worse than when you had your loan modified.
Second, a loan modification will require payment of principal. Therefore, if you have an option ARM loan (a pick-a-payment option) or an interest-only loan, the loan modification payment in all likelihood will be higher than your prior payment amount. Also, loan modification payments will include a mandatory impound account for taxes and insurance, further increasing the monthly payment.
Third, a loan modification payment will start with a teaser interest rate of 2 to 2.5 percent and then rise over time. If you miss any payments on the loan modification or are beyond the grace period of making your payment, the lender can go back to the original payment terms and resume the foreclosure from its prior point without starting over. This means, pack your bags and hope that you find a place for your family to rent with ruined credit.
Fourth, a loan modification requires enough income to qualify for a real loan (i.e. either a 30 or 40 year fixed loan). If you couldn’t qualify for a 30-year fixed five years ago, how are you going to qualify now? If you don’t receive a regular paycheck, your bank account still needs to show income. Loan modifications are much harder for self-employed individuals. If you are unemployed and collecting benefits, the lender will not consider this income, therefore you will not qualify. Additionally, if you’re underemployed, the same results will apply — “Denied.”
Fifth, even a trial modification does not mean a permanent modification. There are people who have been in trial modifications for more than one year with no permanent resolution to their modification. Lenders are being paid with default servicing fees to work on modifications. The loans are in default and they’re in no rush to do a loan modification. Therefore, take action or prepare for the consequences.
Sixth, there is no law requiring lenders to provide loan modifications. The lender can do the “net present value test” and simply deny the requested modification based on the borrower’s long-term ability to pay up combined with their present collateral. In the northern Nevada area, collateral is usually considered a bad investment by your lender or bank.
In conclusion, most loan modifications make no sense because in the long term, your principal and payments won’t go down. The exception is where the balance on the first mortgage is close to the fair market value of the property (not common in northern Nevada) and you have the ability to pay on a real loan. If you are considering a default on your home or considering loan modification, seek legal counsel to fully understand the consequences of your decision and the other options available to you.
If there’s no hope to modify my loan, what should I do?
If you’re at the point of no return (three to four months or more behind in your mortgage payments), have had a notice of default served on your property and you can’t afford your monthly payments, you have three options: short sale, foreclosure or bankruptcy (contact an attorney).
Choose foreclosure and it may take up to a decade to qualify for another home. If you choose short sale, there are terrific programs to help you. Contact a local realtor, attorney or CPA for more information regarding the tremendous benefits of short selling your home versus foreclosure. Stop giving yourself false hope that the bank or the federal government will help you out of your bad investment. You could be evicted from your home with nowhere to go if you don’t take the steps to control your own future now.
Annie Christian is a real estate broker and owner of The Annie Christian Real Estate Group. She helps with everything from buying and selling to foreclosure and short sale. To submit a question, call 351-5117. Her website is www.anniechristian.com.