The business of reputable Loan Modifications is just getting a foot hold and beginning to grow into big business. Modifications like many other areas of the law that are inaccessible either due to complexity or fear begins to take on an aura of impossibility and a perception of true horror. Before long, myths form and spread like wild fire where the wrong information is so common place as to begin to make people believe it to be true. I will attempt to correct the 5 most common misconceptions surrounding Loan Modifications today.
Myth 1: You need to be late on your mortgage.
Truth: You DO NOT need to be late to modify your existing loan.
In fact the Home Modification Program Guidelines of March 4, 2009 (HMP) reward lenders for doing modifications on loans that are not delinquent with higher incentives paid to the investors and servicing companies. There is also a section named “Reasonably Foreseeable Imminent Default” which mandates that participating lenders or servicers run the NPV test on those loans not yet in default but will be in default should they not be modified.
Myth 2: You need to hire a Loan Modification Company or Attorney.
Truth: You do not NEED to hire an attorney or company to help you do a loan modification.
As the borrower, you are capable of completing the loan modification on your own without paying for assistance. There are free services available to you, should you seek assistance they can be found at HUD.gov and a slew of other websites including most state Attorney General’s websites. If you decide to use a service outside the free services be sure that the service has the ability and experience to help you. Loan Modification scams are prevalent throughout the country. Many states have instituted laws mandating that only certain people and companies can charge a fee to assist in a loan modification. Typically, licensed mortgage brokers, bankers, real estate brokers and attorneys are allowed to collect fees to assist in loan modifications. In New York State, you must be licensed to practice before the New York State courts or be a licensed mortgage broker to be allowed to charge an upfront fee for your services. Be careful dealing with any company that is not located close to you. We suggest that you chose a company located relatively close to you with a brick and mortar office who can provide a reference or is a referral.
Myth 3: A loan modification is a quick process.
Truth: A typical loan modification can take anywhere from one to four months.
We see that most modifications are resolved in about 90 days; however, we have had a few that took less than a month and some have taken as long as six months. There is no real formula as to timing but you must stay in touch with the lender regularly, at least once every fourteen days.
Myth 4: Everyone will qualify for a loan modification.
Truth: Not everyone qualifies for a loan modification.
The criteria is relatively specific and under the HMP and Making Homes Affordable Act, you need to qualify. The HMP Guidelines state that the lender can use a variety of techniques to lower your monthly payment to where you would qualify under the terms of the program.
Interest Rate: A lender may choose to lower your interest rate to as low as 2% and the lender may choose to fix that rate or create a stepped rate fixed loan where the rate would increase by one percent after 5 years and then again after one year to a maximum of 4% (the Freddie Mac limit at the time of the modification) for the remainder of the loan.
Principle Forbearance: Lenders may forbear principle to qualify a borrower for a modification. A lender may remove a part of the principle balance and not collect interest or penalties on that portion of the principle. That portion of the principle would have to be repaid upon selling, refinancing or otherwise transferring ownership of the premises.
Principle Reduction: Lenders may at their option reduce the amount of principle owed by a borrower. Lenders typically do not use this option regardless of the value of the premises and the amount owed to the lender.
Term of the Loan: A lender may extend the term of the loan to a maximum of 40 years to spread payment out and make payments affordable.
Combinations: Lenders typically use a combination of these options to maximize returns and make the mortgage affordable. A lender may reduce the interest, create a stepped fixed loan, and extend the time period for repayment to 40 years so that the payment will be affordable and the lender will still make some profit on the loan.
Myth 5: I have no options because I don’t qualify under the MHA or HMP programs.
Truth: You may qualify under programs specific to your bank.
Although a borrower may not qualify for a modification under the HMP or Making Homes Affordable Act, the lender may still modify your loan or loans. Many lenders have modification programs other than those put forth by the current Administration. Modifications are costly to the lenders and investors; however, they cost far less than foreclosures and lenders are therefore willing to modify your loan in the hopes that you will make payments and remain current. Each bank has different programs and guidelines, so you need to contact your bank or a qualified representative to help you determine what program is right for you.