Honey, Start Packing!

With more and more homeowners experiencing financial difficulties due to changing job situations and other factors beyond their control, loan modifications may be the best way for many people to reduce their monthly payments so they can stay in their homes.

What a loan modification is, and what it is not

A loan modification is a temporary fix to assist with changing financial situations. It is not a long-term fix, nor a gift from the bank to reduce your mortgage balance to the current market value.

You’ll need to show some sort of recent financial hardship in order to qualify for a loan modification, such as temporary disability, a reduction in income, a change in family status, mandatory relocation, or similar situations that would affect your family’s income.

Programs to reduce your mortgage balance

The HOPE for Homeowners Program, which reduces your mortgage balance to 90% of your home’s current appraised value, is available to buyers who qualify for an FHA refinance into a new 30-year fixed loan at this new balance. It completely replaces your old mortgage(s), and you will not owe any payments, fees or debts on those mortgages.

Costs for the HOPE for Homeowners refinance include a 3% up-front premium for mortgage insurance, and a 1.5% annual mortgage insurance premium that will be added to your monthly payments. Second mortgages are prohibited for the first five years, unless they are required to complete emergency repairs.

HOWEVER, there is a catch, and it’s a big one: After you refinance into the HOPE for Homeowners Program, the FHA will own a portion of your home. You must agree to share both the equity created at the beginning of this new mortgage and a portion of any future appreciation in the value of your home.

Example: If your home appraises at $500,000 and it is refinanced through this program at 90%, or $450,000, the FHA will share in that $50,000 of equity based on the table below. This means that if you sell or refinance your home in Year 1 after the refinance, the FHA will keep up to $50,000 in proceeds.

You will also be required to share any future appreciation in the value of your home with the FHA. If your home’s value has gone up between the time you receive your FHA mortgage through the Hope for Homeowners Program and the time of your home sale (or other disposition), you will share the amount of this increase with the FHA, less closing costs and a portion of any improvements you have made. This is a 50/50 split that does not change over time. Using the example above, if you refinanced your home through this program at an appraised value of $500,000 and later sold it for $550,000, that $50,000 difference would be split 50/50 with the FHA, allowing you only $25,000 of that equity increase before adjusting for closing costs and improvements.

To apply for the HOPE for Homeowners Program, contact your bank or another FHA-approved lender. The FHA does not work with consumers directly for this program.

Loan Modification programs to reduce your monthly payments

Programs to reduce your monthly payments are designed to reduce your interest rate, thus reducing your monthly payment. These programs do not reduce your mortgage balance, but they can be structured to cover any past-due mortgage payments and property tax payments. Typically any past due mortgage payments and property tax payments are added to the balance of your loan, a new interest rate is assigned, and then a new monthly payment is calculated.

You may also request a temporary forebearance, where you payments are suspended for a few months. However, after the forebearance period expires, you will be required to pay the missed payments along with your regular monthly payments unless you request a loan modification. In this case, you would reapply for the loan modification after the forebearance period expires.

Once you apply for a loan modification, it can take weeks, or even months, to get a response from the bank. Your file will be assigned to a negotiator who will process your application and come up with a proposed solution. If you feel that the solution that they offer you is not acceptable, ask if they can modify their terms somewhat to make the modification more workable for you.

You’ll need to be prepared to supply the bank with the following information in order to process your loan modification. Your preliminary application may be taken over the phone, and then they’ll request a fax of the documentation they require.

• Current Financial Information. You will need to go over all of your financial information with the bank’s representative, including your current income, balances in bank accounts, monthly expenses (in detail) and your projected income if you’re currently unemployed or self-employed.
• Hardship Letter. The bank may not request this in writing, but they will want to know what changed (other than the value of your home) that makes it so you can’t meet your current mortgage obligations. Be prepared to provide details in case they ask. The most common hardships are job losses or reduction in employment income and medical situations.
• Documentation. Be prepared to provide copies of your recent bank statements, tax returns, pay stubs and W-2’s. Include all pages of your tax returns and bank statements, not just the first pages. You may also be asked to provide a copy of a current utility bill to show that you’re still living in the home instead of renting it out to someone else. Don’t leave any bank accounts out hoping that they won’t find them. You don’t want to be prosecuted for fraud later!

After you have provided this information to your bank, check in with them once a week or so. This lets them know that you’re being proactive in getting this situation resolved, and it also gives them the opportunity to clear any open items that may be in pending status in your file. Remember to verify that they have not scheduled a foreclosure auction date while you have them on the phone – this should be put on hold during the loan modification process, but sometimes this can be overlooked.

Paying for loan modification services

Working directly with your bank or any of the government-sponsored counseling services for your loan modification will cost you nothing.

If your bank is being uncooperative, first ask to speak to a supervisor to make sure your negotiator has considered all options available for you. If you have no income now and can’t show that you’ll have income in the foreseeable future, then a loan modification may not be possible, and you may need to consider a short sale instead. Do remember to be pleasant with the bank reps, they’re doing the best they can to help you out, and getting angry with them won’t get you anywhere.

The Realtor  who helped you purchase your home may be of some help in getting you through the loan modification process, but generally Realtors are not loan modification experts, nor are they allowed to collect up-front fees for this type of service.

If decide to hire an attorney or other advertised loan modification service who asks for an up front fee, be sure to do your research before you get out your check book. An attorney cannot guarantee to get you better terms than you could get by yourself, regardless of what their ads may say, although some homeowners have reported good results from having attorneys assist with their loan modifications. If anyone asks for an up front before they’ll look at your situation, run the other way, as California now prohibits service providers from charging up-front fees for loan modification services.

Filing bankruptcy

Many banks strictly prohibit both loan modifications and short sales if a homeowner has an active bankruptcy filing. Some will allow the bankruptcy if the home is excluded, but most will flat-out refuse to negotiate a short sale or loan modification while a bankruptcy is in progress. Some of this comes down to timing, with many bankruptcy attorneys suggesting that the bankruptcy filing be delayed until after the house situation has been resolved, either through a loan modification or a short sale. Consult a qualified bankruptcy attorney for further advice on this.

Consider a short sale if the loan modification is denied

Many homeowners decide to do a short sale instead of letting their homes go into foreclosure, since a short sale will generally have less of an impact on the borrower’s credit report. For military personnel or other workers with security clearances, a foreclosure may be considered to be the equivalent to a felony when it comes to granting security clearances, and thus should be avoided if at all possible.

With a short sale, the home is sold to a regular buyer at a price that is less than the amount that you owe to your bank(s). You’ll list your home for sale with a Realtor and have it available for buyers to view just as you would with a regular sale. After you receive an offer from a buyer, your Realtor will submit the offer plus additional short sale documentation to the bank, and negotiate on your behalf to encourage them to accept the buyer’s offer.

If you decide to do a short sale, be sure to hire a Realtor who knows their way around this convoluted process, preferably one who has their CDPE designation (Certified Distressed Property Expert) and some experience with short sales. Don’t worry about commissions and escrow fees on a short sale, they’re paid by the bank anyways. Hire the best Realtor you can find so you’ll have a higher chance of getting the short sale approved and closed. This is not the time to be using family or friends to sell your home, unless they have the proper qualifications and experience with short sales.

Expect to pay nothing out of pocket to do a short sale, and expect nothing in your pocket as the result of a short sale. Don’t expect (or accept) charges for ’short sale service fees’ that you’ll pay out of your own funds. Yes, short sales do take more time and effort to process than regular sales do, but taking advantage of the situation by charging significant service fees for short sale transactions brings up the question of ethics. 

Click Here for more detailed information on short sales.