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5 Myths about Loan Modification
Myth 1: You have to be behind on your mortgage
I can’t tell you the number of times I have met with a new client who has gone into foreclosure because they received the bad advice that they had to fall behind on their payments in order to get their loan modified. This is simply not the case. The federal Making Home Affordable Modification Program was designed to help borrowers who are already behind AND borrowers in danger of falling behind. Most lenders call this imminent default and have a special modification division that handles these borrowers. While it is true that once you fall behind on your mortgage payments you will begin to receive plenty of correspondence from your lender telling offering your modification assistance. And it is also true that once you stop paying there may be more incentive for the bank to modify your loan and get you paying once again. But you have to remember that if you stop paying your mortgage several things will inevitably happen. First, your credit will be negatively affected, sometimes quite severely. Second, your lender will start foreclosure proceedings against you. Once this happens you will need to defend yourself and will likely incur significant attorney fees and expenses. You will also incur late fees, penalties and legal fees from the lender which, if and when you do receive a modification, will be added to the principal that you owe! Furthermore, you will have to deal with the emotional stress and unease that comes with knowing that you could at some point soon be losing your home to a foreclosure. If you are not behind on your payments it is best to stay current and apply for a modification as an imminent default borrower. If you can show a reduced income or some other hardship that is making it difficult for you to stay current with your mortgage payment, you should be able to obtain a modification without being behind. Also keep in mind that if you are experiencing resistance in modifying your mortgage because you are current on your payments you may qualify for a refinance under the Home Affordable Refinance Plan.
Myth 2: You have to have a negative income every month to show a hardship
While it is true that you must demonstrate a hardship in order to receive a loan modification under the MHA, most lenders do not want to see your monthly bank accounts in the ‘red.’ In fact the exact opposite is true. If your monthly expenses vastly exceed your monthly income, most lenders will view you as a substantial risk of defaulting again in the future. If you are currently in the red every month it would be wise to take some time examining your expenses and cutting back where necessary before you submit your documents to the lender.
Myth 3: You can only modify your primary residence
Contrary to popular belief you can modify a mortgage on an investment property. Of course modifying a mortgage on an investment property is not nearly as simple as modifying a mortgage on a primary residence. Only primary residences qualify for modification under the federal MHA program so you will have to apply for an internal lender modification. The good news is that most lenders do offer their own variations of loan modification. Many times these internal modifications are constructed quite similar to federal modifications as far as the interest rates and payment structures so they are not a bad option. One potential issue that homeowners run into with internal modifications is that without federal guidelines the language and structure of the modification may be a bit confusing. Reinstatement and forbearance plans are not modifications and can be a bit misleading in the way they are presented so a homeowner should carefully review any potential plans they receive.
Myth 4: Principal reductions are a standard part of a true loan modification
In early 2009 Bank of America announced that it would now be offering principal reductions to many of its borrowers. Unfortunately, what BOA didn’t tell the public is that the guidelines used to determine who qualifies for a principal reduction are quite extensive. For example, only severely underwater mortgages with incredibly high rates of delinquency, such as subprime loans, pay-option ARMs and prime two year hybrid ARMs that are 60 days or more delinquent, will qualify. Out of the millions of loans that Bank of America owns and/or services they estimate that about 45,000 people will qualify for a principal reduction under their plan. That’s only about 3% of all borrowers! Furthermore, the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac won’t allow them to participate in principal reduction so a large number of loans will not qualify for principal reduction at all.
Myth 5: Your credit will not be affected by a loan modification
Unfortunately this is not exactly true. While a loan modification itself will not necessarily affect your credit, several factors may affect what the impact may be on your credit score. For example, if the lender agrees to reduce your principal as part of the loan modification, they have essentially ‘forgiven’ a part of your debt. In that case, the lender may report the account “paid for less than owed” which is not good for your credit score. Also, many times prior to receiving a modification a homeowner will fall behind on their payments. Clearly, being late or missing payments will reflect negatively on your credit rating. Despite these negative implications, if you do receive a modification under the HAMP program your servicer must report the account as “current” and also identify the loan as “modified under federal government plan.”
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