Troubled homeowners are so worried about losing their home they will do anything to save it. This generally ends up including a loan modification. Loan modifications are a way of reducing monthly payments by a) reducing interest rates, b) extending the tenure of the loan, and c) in some rare cases even by reducing the principal balance of a mortgage.
However, many home owners are starting to realize that interest rates and mortgage payments are not the only things that are being lowered. The credit score of homeowners is being reduced by up to 100 points just for entering a loan modification program. 100 points in a scale that generally goes from 300 to 850 points is a significant blow to a homeowner that has taken good care to protect his credit rating.
The big question is: is it fair? Should it be done?
The main argument housing counselors are putting forward against this practice is the lack of transparency. Most of the times troubled homeowners that ask for a loan modification feel like they are doing the right thing by trying their best to pay for their mortgage despite financial problems. When they realize that there credit score has been hit despite their efforts the sometimes feel cheated.
Are they justified? It seems reasonable to me that lenders and mortgage servicers provide clear information on the consequences of taking on a loan modification. But would a troubled homeowner applying for a loan mod change his mind just because he realizes his credit will be affected? If they do, it probably means they did not really need it to start with.
Why should a loan modification affect your credit rating?
Credit scores and rating are in place to do one thing, help banks and lenders know how reliable a borrower you are. Reliability in this industry is proven by your credit history that is how good you have been at paying your debts, your income and your commitment to the security of the loan, in this case your home.
A credit score is a numeric value assigned to you that qualifies your credit history and how desirable you are as a lender. Now, let us try and detach the emotional aspect of being a troubled homeowner and think about the consequences of a loan modification. A loan modification will in the vast majority of cases mean a reduction in interest, principal balance, or both. This means the bank is losing money. Losing money the borrower agreed to pay. By applying for a loan modification the borrower is stating he or she is struggling to make the payments they agreed to make. Shouldn’t that affect their credit rating, their reliability as a borrower?
Even though applying for a modification will take a chunk from your credit rating it is probably going to shade into insignificance compared to the effect falling behind in your mortgage payments and God forbid, foreclosing on your home. These actions can leave your credit score in tatters for years, and fade into insignificance when compared with a 100 point hit.
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If loan modifications are not an option and you want to avoid foreclosure or bankruptcy a short sale of your home might be a good option. The key when you are undergoing a bad financial situation is like with every emergency and try to think clearly without letting raw emotions take over. You must analyze the situation and work out what is the best option for you. Although it is a good idea to hire an experienced lawyer in real estate issues, nobody can do all the thinking for you, you have a unique understanding of your situation and more importantly you will be the one that will suffer or enjoy the consequences of your decisions.
A short sale is the sale of your home at a price lower than the purchasing price. It is an option to be considered if you do not qualify for a loan modification, due to a lack of income or when you own a home that is worth less than what you owe on the mortgage.
Obviously the key player in a short sale is the lender. The lender is, after all, the party that may have to take any losses that occur by short selling the house. However, in some short sale agreements the buyer can be made responsible for the difference between the price of the short sale and the balance of the mortgage. Needless to say that is not the ideal type of mortgage for you, the homeowner.
There are three possible outcomes a lender may agree to when negotiating a short sale. The key concept you negotiate in a short sale is what will happen with the deficiency balance or the difference between price of the short sale and the pending balance on the loan.
The first option a lender may try for is to lay the deficiency balance on the lap of the homeowner once the short sale has been carried out. Needless to say homeowners do not often profit all that much from this kind of short sale.
A second option is for the homeowner to sign a promissory note to the lender for the deficiency balance. This means that the homeowner will have to pay whatever agreed in the promissory note if the there is a deficiency balance after the short sale. However if the deficiency balance is larger than what the homeowner agreed to pay in the promissory note the lender will absorb the difference.
The third option is the one you need to aim for if you are the homeowner. In this case the lender agrees to cancel the entire deficiency balance, or difference between the short sale and the pending balance on the mortgage. As you probably guessed lenders are not waiting in line to offer this kind of deal, you will have to work hard for it.
The most important part of negotiating a short sale is to convince the lender that it is in their best interest to accept a short sale. To do this you must a) prove you cannot afford the mortgage due to a valid hardship and do not have the assets to pay for the mortgage and b) present your home as a business opportunity for the bank.
In order to do all that, you are going to have to submit a whole lot of paperwork to your lender. This will include:
A) A hardship letter that explains why you are in financial trouble and explains how you do not have the income or savings to pay for the mortgage.
B) Proof for all the claims you make in your hardship letter. This will include proof of unemployment or of your current pay if you are still working. You will also need to prove what income you have through bank statements and tax returns. The lender will no doubt ask you if you have access to pension funds, stocks or some other type of investment. You will have to provide a written statement that answers these questions and explains why they are not accessible.
C) You need to provide an up-to-date valuation on your home. This you can carry out with a broker’s appraisal and by providing analysis of closed deals or active listings of similar properties in your neighborhood.
D) Authorization to the lender to release information on you and the property.
It is a good idea to prepare this paperwork with care and hire a good real estate attorney. The good news is that if you play it well you can include the price of the lawyer in the proceedings costs covered by the lender.
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Mortgage modifications are the only hope for millions of Americans that cannot continue paying their monthly payments. One of the typical reactions when people are behind in their payments and cannot see a way out is to simply ignore the bank or mortgage lender. This is a terrible idea that only makes things worse.
HOPE NOW the government run free mortgage counseling program explains the reasons why you must contact your mortgage provider as soon as possible in a new Video narrated by Queen Latifah. The video explains the consequences of not contacting your bank when you are behind in your payments or fear you will be in the near future.
The video illustrates this point through various real life cases of people that initially were reticent to calling their bank but were able to face their fears and solve the situation.
Another issue that the video deals with is that many banks are completely overwhelmed with the volume of borrowers that are calling to ask for loan modifications. Hope provides a way out by advising borrowers to head to theHUD.gov website to find advice and help when lenders cannot (or will not) reply to their calls.
This video deals with two serious issues that are causing many to lose their homes unnecessarily:
1) Borrowers not contacting their banks and finding a negotiated solution to the debt and
2) The apparent inability of banks and lenders to deal with the great number of borrowers in need of help.
Borrowers don’t contact their banks for various reasons. As illustrated in the new HOPE NOW video many borrowers don’t contact their bank about their late payments because they don’t have a good payback plan to present to their lender and feel embarrassed to contact them. Other’s have little understanding of the options at their disposal and simply ignore the efforts of the bank to contact them. Still others are not even sure who their lender is or how to contact them. The video illustrated how to find out by checking one of the mortgages payment slips which carries the lender’s name and telephone on the back.
The speed at which banks are dealing with customers loan modifications has caused many to feel that banks are not committed to providing loan modifications and are dragging their feet going through the motions. Although loan modifications can in many cases be beneficial to both the bank and the borrower, allowing the homeowner to keep his home while the bank can make more money on the same loan, in some cases they are not cost efficient for lenders that would do better foreclosing the loan.
The government has recently committed extra funds to incentivize banks into accelerate their mortgage modification programs in order to help the millions of Americans that risk foreclosure on their mortgages this year.
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Fighting Foreclosure, What Are Your Home Loan Refinancing Options?
Have you heard of the caught in the headlights syndrome? It is a serious problem for wildlife in areas that are crossed by highways. Many animals like cats, dogs and deer will stay complete still if caught in the beam of a car’s headlight while crossing the road, transfixed by the glare. As you would imagine this causes a lot of accidents, often fatal for both animals and humans.
Something similar happens to all of us when we are hit by a serious financial blow like the risk of foreclosure of our mortgage, we panic. Instead of using that energy to find ways to get out of the whole we are in, we suffer the headlight syndrome and do nothing believing (more often than not erroneously) that there is nothing one can do anyway. The truth is that there is nearly always a way out for those who are willing to look hard enough.
This article provides a list of some of the steps you can take to fix things when you are at risk to foreclosure.
1) Talk to your bank and negotiate a solution. Foreclosure is really a lose – lose situation where nobody makes a buck. It is a last and desperate measure by banks to get some money back from a bad debt but not their preferred option. If a client really wants to pay his debts and keep his home banks will try their best to re-negotiate. It can actually be good for your bank as they can make more money on your mortgage if they extend the term of your mortgage.
2) Take on a loan to pay up the months you are behind. It is often cheaper to simply get a small loan to pay back the money you owe your bank. Borrow from your family, friends or another bank. Just make sure you pay back, you could break important friendships and relationships or destroy your credit rating, both very painful with life changing consequences.
3) Refinance with another bank. Some banks will not renegotiate bad debts but if your credit is still good you can find another bank to renegotiate the mortgage and salvage the foreclosure situation. This is not the best situation in which to ask for a refinancing of your mortgage as you have little leverage when desperate for financial aid but it could get you out of the pickle you got yourself in.
4) Sell the house. This is called short selling the house, which means selling it fast, very likely well below the actual value. The issue with this option is that it is not fast, it could take various months.
As you can see there are options when threatened with foreclosure, don’t panic, look for the option that works best for you and get out the way before you are hit.
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