• Q. Nicole McNair

Beware of Loan Modifications

Amidst the turbulent times home ownership may present, many have been faced with the option of a loan modification in order to avoid the seemingly ever-so-dreadful act of foreclosure. Similar to forbearance agreements and repayment plans, loan modifications are a permanent restructuring of someone's mortgage where one or more of the terms of a borrower's loan are changed to provide a more affordable payment. Often times, the lender may agree to reduce your monthly payment by reducing the interest rate, convert from a variable interest rate to a fixed interest rate, or the extension of the terms of the loan. While a loan modification can present itself as a way out, they are often followed by their own set of headaches most bankers don't warn you about. Here's what you should be aware of before considering a loan modification:

1. How permanent is permanent ? "Permanent" loan modifications are an opportunity for a homeowner to receive an adjustable loan for a period of time with low interest. What makes this option so “permanent”? Frankly, nothing. This option provides homeowners with the opportunity to receive an adjustable loan for a small period of years if they are able to pay the adjusted terms within that time frame. If not, the loan modification may just delay an eventual foreclosure. Bankers sell the idea of permanent relief to homeowners who are in trouble in order to provide them a sense of temporary hope, but not a permanent solution. When in reality, the money spent on trial modification could be spent elsewhere. For example, I assisted a distressed seller who was upside down & behind in her mortgage in selling her own to a cash investor. It was supposed to be a simple deal however, the property was difficult to market because although she had completed a loan modification and reduced her monthly mortgage, she was unaware that the mortgage company had added a balloon payment to the end of the mortgage schedule that caused there to be little equity in her home. This final payment included multiple points (a point is typically 1% of the loan amount and charged to the mortgagee as a fee of the lender for facilitating the refinance), closing costs, past due payments and other lender fees which drained her home of its equity. This really restricted her options and almost caused her to go into foreclosure.

2. Debt is not reduced. In many instances, those who go through the modification program end up with more debt than they started with as the banks roll in late fees and payments into the principal or at the end of the loan. In most cases the debt principal is not reduced and troubled homeowners are left paying for an asset that is worth less than their debt. In continuing with the previously mentioned distressed seller scenario, I vividly recall the seller stating that she regrets having taken the loan modification because she was charged more than $8,000 in fees. That money would have been hers to pocket as profit since she actually sold the home less than a year after completing the modification. In my experience, many owners find that they are further made upside down (upside down means owing more in the loan than the asset (home) is worth) which makes it harder for them to sell or refinance in the future.

3. Credit is not saved. Some consumers mistakenly believed that their credit will be saved if they enrolled in the modification program, but the truth is that banks are reporting trial modifications to credit bureaus as partial payments and credit scores are lowered nevertheless. Additionally, not factoring in the total costs of managing the impact of a loan modification could create financial implications that prevent homeowners from having access to the cash needed to pay other creditors which also negatively impacts their credit.

If you are facing challenges paying your mortgage and are interested in discussing your options for foreclosure prevention, contact our office today as we want to help you walk away with your credit and your finances in tact.

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