The changing economy has brought many Americans into the uncharted waters of home mortgage default, the threat of foreclosure and bankruptcy. Consequently, desperation, panic and the lack of information have left a lot of people vulnerable to the unscrupulous tactics of businesses that prey on homeowners needing serious help in tough financial times. If you are behind on your mortgage and looking to “save your home” through modification there are some things you really should keep in mind.
1) Not everyone who needs a home loan modification gets one. In fact, most don’t, or at least haven’t. According to an article published in WASHINGTON, Feb 17 (by Reuters): “A government program to help struggling homeowners modify their mortgages has almost a million active borrowers, but just over 3 percent of the eligible borrowers have permanent loan modifications, (italics added) according to a Treasury Department report released on Wednesday, February 17, 2010.”
This means that 97% of those who have applied have not received permanent loan modifications as of the publication date of this article. This is nearly one year after the program started.
2) Is your home worth saving? If your mortgage is substantially higher than the current market value of your home, it may be time to walk away and let the problem become your lender’s. If you have noticed that some of your neighbors have lost their homes to foreclosure, it may be that the current market value of your home is so far below the amount you actually owe to your lender, that it simply makes no financial sense to keep it. This means you have negative equity—meaning you owe more than the house is worth. One resource to get a feeling for the home values in your neighborhood is http://www.Zillow.com. A certified real estate appraisal would be more accurate-although it may cost hundreds of dollars at a time when you can least afford to pay it. But before you decide to do “everything you can to save your home,” do it with realistic financial and legal advice. Certainly you wouldn’t purchase a home today that you knew was overpriced relative to the neighborhood “comps.” So find out what your home is worth in today’s market before you decide to take the next step into loan modification.
Another way to potentially get rid of the negative equity in your home may be found through filing a chapter 13 bankruptcy. Often times, the 2nd mortgage can be stripped from your property, through a chapter 13, leaving only a first mortgage. Consulting an experienced bankruptcy attorney is probably a good idea if you took out a second mortgage on your home as some type of equity line of credit and you now find that your home is “underwater.”
3) If I let my home go into foreclosure can I ever purchase another home? FHA guidelines allow for the purchase of another home three years after a foreclosure—assuming you can afford the property you are attempting to buy. There are exceptions to this. We went to their web site and found: “… if the foreclosure of the borrower’s principal residence was the result of extenuating circumstances beyond the borrower’s control and the borrower has since established good credit, an exception may be granted.” If you pay rent on time for a year or two following your foreclosure and otherwise establish a favorable income to debt ratio, there is every reason to believe that you may qualify to purchase another home while prices are still low. This eliminates the negative equity problem you were trying to cure by refinancing your old home and the uncertainty of holding on for the long ride back up in property values. For more specific information visit: http://www.fhainfo.com/creditguidelines2.htm Also see notes 1 & 2 below.
4) What if I do have equity and my home is worth saving from foreclosure through loan modification? If the circumstances that caused you to fall behind in mortgage payments were indeed temporary and all you need is a modification in the amount of your payments and some way to cure the payments you couldn’t make, then a loan modification may very well be the answer for you. It is important to remember that nothing comes free when discussing banks. Let’s say for example that your existing mortgage balance is for $200,000 with payments for principal & interest (5% ) @ $1073 per month X 30 years. If you had made all payments on time, you would have paid a total of $386, 280. Now, take the same loan, and let’s assume that you have missed 10 months of payments. Your new loan balance amount is $210, 730, reflecting the amount you didn’t pay. ON an approved loan modification the lender may extend that new loan to 35 or 40 years. If you amortize that new loan amount over 35 years your new payment is only $10 cheaper per month than the old loan and you have added five years to the contract. 35 years x $1063 per month = a whopping $446, 460.00 for the same house!!! Of course, the problem is made worse if your mortgage payment is reduced over the next year or two to an artificially low installment, only to be added back into the length of the term of the loan. The problem is worse yet if you agree to an adjusted higher mortgage payment and/or higher interest rate later. Of course, we offer no prediction of how your particular loan might be modified so that you can save your house. But be careful and try not to get into a shell game now, only to pay for it later if you actually do qualify under one of these programs.
5) Do I need to pay an attorney to help me negotiate a loan modification? Absolutely not! In fact, it is illegal in California for an attorney, or anyone else, to take any up-front fees to negotiate a modified home loan on your behalf. And frankly, you don’t have to pay anyone to help you negotiate a loan modification. These services are free and can be found at http://www.MakingHomeAffordabele.gov or by calling the homeowners Hotline at 1-888-995-HOPE (4673). You can also contact your lender directly. Recent legislation signed by California Governor Arnold Schwarzenegger made it a crime for attorneys to charge anyone for up-front fees relating to the negotiation of a home loan modification. Simply stated: You don’t have to pay anyone to help you negotiate a loan modification and there are free counselors available to help you every step of the way.
6) Can you explain the process of requesting a home loan modification? Yes we can and to provide this answer we went directly to the federal government’s website and clicked on the video link to obtain most of the following information. http://www.MakingHomeAffordable.Gov
a) First you have to reach out to your lender or HUD Approved housing counselor.
b) Every modified mortgage requires at least a three-month trial period.
c) Your lender has to determine if you are eligible for the program. Your lender may grant a trial modification based on what you “tell them” about your situation with only some of the documentation that is required; but this is not enough to get an official modification. Often the trial modification fails simply because borrowers forgot to complete the documentation. To receive a permanent modification, you must submit a full set of required documents.
d) Start with the request for modification and affidavit form. You can find this form at MakingHomeAffordable.gov. Or ask your lender or HUD-Approved Housing Counselor for it.
e) Next, your lender will need to see your tax return. You can complete the 4506T-EZ form which authorizes the IRS to release your tax form to your lender. Your lender will also need copies of your recent pay stubs and your W2. You can find a checklist of all that is required at MakingHomeAffordable.Gov
f) Be sure you are accurate when calculating your income and expenses. The more accurate you are, the more likely you are to receive a mortgage payment that you can afford. Miscalculating your income can cause higher payments, delays and sometimes disqualifications. If you’re not sure how to calculate your income, you can call the Homeowners Hotline at 1-888-995-HOPE (4673). You can always call a housing counselor at this number. In many cases they can fax or email the documents for you. Keep records of all your conversations with your lender or counselor and keep records of all the paperwork you submit. Respond quickly to all requests for updated documents.
g) If you do receive a trial modification remember: Make your trial payments in full. You must make three payments in a row to stay qualified for the program. During your Trial period, the terms and conditions of your original loan remain unchanged until the trial is over. The trial period may be extended and if that happens continue to make the trial payments to which you committed in full and on time. If you receive a foreclosure notice during the trial period, you cannot be evicted from your home during the trial period. Your trial payment is sometimes not reflected in your monthly statement, but make the trial payment no matter what. The trial period is your opportunity to prove to your lender that you are a good investment. So if you are struggling, call your lender or the homeowners hope hotline at 888-995-HOPE or visit Making Home Affordable. GOV
7) If my loan modification fails, should I consider bankruptcy? You should get sound legal advice from a bankruptcy attorney. Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills can get a fresh financial start. The right to file for bankruptcy is provided by federal law and all bankruptcy cases are handled in federal court. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law. (source: Bankruptcy handbook) If you only have a first mortgage in California that you cannot pay, then foreclosure will likely follow after the loan modification fails. Foreclosure is a process whereby the lender will take the property back. Any deficiency balance on the home is the first mortgage lender’s problem as you can generally walk away from the property without further liability to the lender. However, if there is a second mortgage that you acquired after you purchased your home, e.g. an equity line of credit, then that lender can sue you to recover the losses. This potential event is foreseeable as soon as you find yourself missing payments on that second mortgage. Therefore, you should contact a bankruptcy attorney for legal advice well before any lawsuits are filed against you. Furthermore, bankruptcy is the answer if you have taken personal loans or run up credit card debts trying to save your house. Please don’t make the mistake of depleting your 401K or other qualified retirements trying to save your house because in a bankruptcy these funds are safe and protected from your creditors and you will not lose them.
8) What Can Bankruptcy Do for Me?
Bankruptcy may make it possible for you to:
- Eliminate the legal obligation to pay most or all of your debts. This is called a “discharge” of debts. It is designed to give you a fresh financial start. It is through bankruptcy that the lender on that second mortgage we just discussed will be stopped from obtaining a judgment and collecting the entire amount through a wage garnishment or bank levy.
- Bankruptcy can radically improve your income to debt ratio, thereby enhancing your ability to obtain credit, such as a mortgage sometime in the future.
- If credit cards, personal loans or medical bills were a significant part of the reason you could not meet your original home mortgage obligations, it may be possible to remedy the situation through chapter 7 or chapter 13 bankruptcy.
- Stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. Bankruptcy does not, however, eliminate mortgages and other liens on the property you intend to keep. Except that a chapter 13 can eliminate a second mortgage as we discussed above. This strategy may provide a workable solution to curing the negative equity problem. And while all of this may seem confusing, a bankruptcy attorney can help you understand the process and if either a chapter 7 bankruptcy or chapter 13 bankruptcy offer the strategic financial and legal protection you need.
Bottom line: we are here to help. There is never a charge for an initial appointment and the Law Offices of John C. Kyle can guide you through the circumstances that have created the current problems you now confront. Not everyone needs either a bankruptcy or a home loan modification. Often some clear thinking and good legal advice can prevent a lot of unnecessary grief.
Note 1 from FHA:
BANKRUPTCY – CHAPTER 7 LIQUIDATION: A bankruptcy (Chapter 7 liquidation) will not disqualify the borrower if at least two years have passed since the bankruptcy was discharged and the borrower has re-established good credit (or has chosen not to incur new credit obligations), and has demonstrated an ability to manage financial affairs. An elapsed period of less than two years (but not less than twelve months) may be acceptable if the borrower can show that the bankruptcy was caused by extenuating circumstances beyond his or her control and has since exhibited an ability to manage financial affairs and the borrower’s current situation is such that the events leading to the bankruptcy are not likely to recur.
Note 2 from FHA:
BANKRUPTCY – CHAPTER 13: A borrower paying off debts under Chapter 13 of the Bankruptcy Act may qualify if one year of the pay-out period has elapsed and performance has been satisfactory. The borrower must also receive court approval to enter into the mortgage transaction.