Considering a mortgage loan modification? If so here are nine things you should be aware of and use them to your advantage. While this information may not guarantee a successful loan modification, using these steps can enhance your chances of success.
1) Get a true picture of your expenses and base your new, proposed mortgage loan payment, after your loan modification is achieved, on your “real” income. One way to do this is to simply enter your expenses into a financial spreadsheet program like Quicken. It’s extremely simple and cost effective and you will know exactly where your money is going. Enter each payment you’ve made and then quickly and easily run a quick report by category to see where all your cash has gone the past month! This gives you a clear and honest picture of what your “true expenses” are. Use these figures to negotiate with the lender.
2) Ideally, you’ll want your new mortgage payment, after your loan modification, to equal not more than 31% of your gross income. These figures are within the guidelines of the Obama Administrations’ making home affordable program. If you stay within this target range your loan modification stands a very good chance of succeeding.
3) Be sure your loan modification request is assigned to a “Negotiator” within the bank or loan servicer’s operation and not just a collector whose job is simply to try and collect money from you. Get to the “loss mitigation department” and insist on dealing directly with a Negotiator assigned to your specific account. Insist on a fixed rate interest loan for your new loan modification. Your goal is to negotiate for a new mortgage with a fixed 30 year or 40 year interest rate so you know exactly what your monthly mortgage will be until your home is completely paid off. Ask for an interest rate of 2% over a minimum period of ten years with a gradual annual 1% increase over several years capped at a 5% for the remainder of the fixed period. Even if your initial request is denied the lender will usually offer something within those ranges or similar, if the homeowner is determined by the lender to meet loan modification guidelines. If you don’t ask you won’t get. The more knowledgeable you appear to the lender the better the deal offered.
4) Don’t simply agree to allow any past late fees, past due payments, origination fees or any other garbage fees to be tacked on to your balance after your loan modification. Fight for a principle reduction. (See step 6 below).
5) Consider converting your existing mortgage to a 40 year term if it makes sense after your loan modification. A 30 year mortgage is better for you over the long term but a 40 year loan can make sense if you’re more able to make your monthly mortgage payment after your loan modification is approved.
6) Make an attempt to get your loan servicer/lender to reduce your principal loan balance. This is much easier when you’re “upside down” on your principal residence. If you owe more on your home than its current market value there is a chance your loan principal may be reduced to something closer to your home’s actual value. Make an effort to get the lender to write off a second mortgage if that same lender holds the first mortgage on the home. If there is a second mortgage on the property held by a different lender there is a good chance you can negotiate a payoff on that mortage for pennies on a dollar.
Nationwide, second trust deeds on properties in a pending foreclosure can be negotiated down to as little as $3,000 or less. If the primary lender is willing to modify the loan to payments the homeowner can afford and the homeowner can pay off the second mortgage with cash, borrowed or otherwise, it should be done. Wiping out the second and having a modified first mortgage would be the goal in such a situation.
Although the banks are not required to reduce the principle amount of the loan to the present value of the home, you should lobby strongly for a reduction of principle as well as a lowering of the interest rate. The lender will generally insist on tacking any back payments on the back of the loan. If you are unable to get them to just forget past payments, insist that any amount of back payments be tacked on to the back of the modified loan and that such amount will not accrue interest and that it will only be paid when the loan matures. Doing it this way your modified loan only involves the amount of the loan due on the note with the lower modified interest rate and extended amortized period. This should give you a monthly payment that is affordable and manageable on a monthly basis. Stick to your guns. Lenders don’t want the property back. They want a performing loan.
7) Keep records and documentation of every phone call, letter, email; all communications between you and your loan servicer or lender. Always stay calm and be very persistent!
8) Avoid scams. In virtually all states, there are now laws on the books that prohibit “loan foreclosure consultants” from taking money upfront from any homeowner that is in foreclosure and seeking help with a load modification. Generally only attorneys are exempted from these rules and in some states even attorneys are prohibited from taking up front fees also. Unfortunately, where lawyers are precluded from handling loan modifications without a retainer fee up front, this limits many deserving distressed homeowners from obtaining competent legal counsel to assist in obtaining a loan modification. If you seek the advice of an attorney, satisfy yourself first that the attorney has experience in obtaining loan modifications. Ask for references and check with the State Bar to see if the attorney is legit or has a prior discipline record.
9) Finally, remember that there are situations in which it is best to simply walk away. Just get rid of the property. If you can’t keep it try to deed the property back to the bank in lieu of a foreclosure or get a Realtor and short sale the property. The federal government also has a Home Affordable Foreclosure Alternative program (HAFA) that assists homeowers facing foreclosure and who don’t qualify for a loan modification. HAFA helps the homeowner to just walk away without a foreclosure on the record. It also provides money to help with relocation expenses. It may hurt to lose a home, but there are times when it’s best to shed the weight and start over. Millions of other homeowners are paddling in the same boat . Usually there will eventually be another opportunity to obtain a home.
Roy Landers is an Attorney and Real Estate Broker with more than 25 years of real estate and investment experience. He maintains a blog on real estate investing and foreclosure prevention. He also publishes a free newsletter “The Real Estate Playbook” that can be subscribed to his Housing Americans website.