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Sunday, February 27, 2011

Make Sure You Qualify for a Mortgage Modification Before You Try to Get One

Like us, many people are stuck in the middle of a mortgage modification mess. The Obama Administration's program to help financially stressed homeowners reduce their mortgage payments is a dud. I am still in utter disbelief that, whether your mortgage is with Fannie Mae and Freddie Mac or if you have a FHA or conventional loan, can make a difference whether you are approved for a loan modification or not.

The House GOP wants to end "failed and ineffective" housing programs, such as the Home Affordable Modification Program (HAMP), the Neighborhood Stabilization Program, the Federal Housing Administration Refinance Programs and the Emergency Homeowner Relief Fund.

"In an era of record-breaking deficits, it's time to pull the plug on these programs that are actually doing more harm than good for struggling homeowners," Rep. Spencer Bachus, an Alabama Republican who chairs the House Financial Services Committee, said in a statement." 
While these programs are not gone yet, I think Bachus is completely correct. Just over a third of households enrolled in a trial loan modification through the Home Affordable Modification Program (HAMP) have been given a permanent modification.  This was as of November 2010 and until June 2010, banks were still enrolling homeowners in trial modifications without verifying whether they qualified or not. So, you may have been given false hope that you qualify only to find out months later that you were turned down.

Here are seven main points of supposedly what you need to qualify for a loan modification:
  1. Your loan must be less than $729,750.
  2. You must live in the property. (Investment properties are not allowed. However, I was able to get a mortgage modification on my investment property.) Odd very odd. Sounds fishy to me.
  3. You will have to fully document your income. You will have to provide your most recent tax returns and your two most current pay stubs. Have your bank statements ready while your at it too.
  4. You must have received your original mortgage before January 1, 2009.
  5. You will have to sign an affidavit financial hardship.
  6. The total payment on your mortgage including principal, interest, taxes, insurance and homeowners association dues (HOAs) must exceed 31% of your current gross income.
  7. If your total household debt, which includes loans, credit cards, and alimony payments, total more tan 55% of your income, you will have to agree to sign up for financial counseling.   
I had originally found all of those qualifications to be true (with the exception of the investment property portion), when Bank of America granted us a loan mod on our rental property. I thought for sure we were going to receive the same deal on our primary residence. Boy, was I wrong.

If you are planning to try and get financial help and apply for a mortgage modification with your bank, be sure that you are ready for the worst. Here is what you should be prepared for:
  • Your credit score will drop. Even if you are offered a trial modification, the lesser amount that you are now paying on the mortgage during the trial will be reporting to the credit bureaus.
  • It may take three months or more (In our case fourteen months and counting) to know if you were approved or not. HAMP's original goal was to give homeowners a three month trial period. However, the more people I talk to more I keep hearing six months, a year or even two years, before getting an answer. Hold on this could be a bumpy ride.
  • Making timely payments during the trial does not guarantee you will receive a permanent modification. See the 7 points discussed above. I am now suggesting that you know the bank's criteria for eligibility before you attempt to get a modification.
  • Be ready. If you are turned down for the permanent modification, the bank will make due the difference you haven't been paying between the normal payment and your trial period payment for every month you were not making a regular payment. If you cannot pay the back payments, which could be 12 or even 24 months worth, you will most likely be facing foreclosure. If you are going to attempt a modification you need to put aside the difference in savings or will most likely lose your home. 
On one hand I say the loan modification program is great, but only if all loan mods were like the one we received on our rental property. It was exactly what the doctor ordered. An interest rate of 2% for five years, followed by an 1% increase until the rate reaches the prevailing rate, which at the time was 4%, for the life of the loan. If we received the same deal on our primary residence I would be a full supporter of the program. I do know the program has helped hundred's of thousands of homeowners and maybe will still help more by its expiration in 2012, if not sooner, but it still gets be going that the guidelines can be modified by who the investor is or by what type of loan program you have. The program doesn't necessarily need to be bust, but something need to be done to give everyone a fair chance. especially, for those who truly want to save their home.

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