South Atlanta Househounds

For the background on what a loan modification is, how it works and if it can help you, click here.

Step 1 – Evaluate Your Situation

Honestly decide if a loan modification is what you truly need. Only 37% of loan modifications end up with the homeowner attaining at least a 10% reduction in monthly payments. So using 10% as your target, if your monthly mortgage was 10% less than it is now, would you be able to maintain your monthly finances? If your answer is no then it may be better to consider a short sale or deed in lieu of foreclosure and plan on renting for a while. You also need to consider the amount of time, trouble and effort you are willing to put into attaining a modification. Even if you utilize a government or non-profit company it is still going to take a lot of your time just to get the information together. You should expect that this process will take 3-4 months to complete and you should plan on spending 3-4 hours each week.

Step 2 – Have Realistic Goals

Everyone would like a principal reduction, but that very, very, very rarely happens. In the past year only 2% of all loan modifications had a reduction in principal, and nearly all of those were in California or Michigan. As stated above, a reduction in monthly payments of over 10% is a good starting goal but your specific situation may require different goals. Remember that this is a negotiation and in a successful negotiation each side has to give some and take some. Please don’t threaten or try to throw your weight around telling them to come and pick up the keys. You will feel like telling them that several times through this process, but bit your tongue and remember what your goals are and have a plan to achieve these goals.

Step 3 – Get Your Paperwork Together

Regardless of who owns your loan, nearly all the mortgage companies will require the same basic information. The more information you have ready at your disposal the easier this entire process will be. Also the more information you have ready, the better informed you are as to what concessions you are willing to give on and which you can’t when you get to step 5, the negotiation. The usual documents you will need are:

• Proof of income.
• At least four months of bank statements.
• A hardship letter explaining your situation and requesting a loan modification.
• A monthly expense sheet detailing all your expenses.
• Your most recent mortgage statement
• 2 years W2 forms
• 2 years tax returns

Most of the list is self explanatory, but the hardship letter is critical. The hardship letter should be about 1 page long, but no more than 2 pages ever as most lenders and extremely busy, backlogged and staffed with overworked employees so keep it short and to the point. It should be a basic blueprint of how your current financial situation is, how you got into this situation and any other issues affecting your ability to meet your financial obligations.

Remember to include any of the following issues in your hardship letter if they apply: adjustable rate mortgage reset, death, death of a spouse or co-borrower, loss of job, reduction in salary, job relocation, did you business go under, divorce, separated, accident, illness, medical bills or military duty. I do not suggest you try and convince them about your local real estate market or how the value of your house has gone down as most lenders do not do any principal reductions anyway. Don’t blame the lender and don’t blame the value of your house. It is not the lenders fault that you have the loan on your home and trying to say that you can’t pay because your house is worth less now than what it was when you bought it doesn’t make any sense. You may not want to pay, but it doesn’t mean you can’t.

Step 4 – Contact Your Mortgage Company

It’s astounding the number of delinquent borrowers who never have the courage to pick up the phone and just talk to the lender before heading into foreclosure. Make the call and ask to speak to customer service. Have a note pad to keep up with everyone you talk to and what each person says they are going to do, yourself included. Identify yourself and ask to speak with the loss mitigation department. Don’t spend too much time with customer service, they generally can’t help you, but before you get transferred, ask for the direct dial number for the loss mitigation department. This will save a step in your many, many follow up calls.

Once you get the loss mitigation department get the name of who your speaking with and position and let them know your keeping a record of all your conversations to ensure all the I’s are dotted and t’s are crossed. Explain in general terms to the person that your having trouble making your monthly payments and that you are or may become delinquent on your loan and you need to modify it or there is a serious chance you’ll fall farther behind or could go into foreclosure. Don’t throw out the foreclosure word too much or threaten them, if they feel your headed into foreclosure they won’t waste their time with a lost cause. What you want to clearly communicate to them is that this is a serious problem and it requires their immediate attention.

Be prepared for them to ask you some basic questions. Have the list I gave you above handy to help with specific details. You MUST be honest or it will come back to bite you in the butt. You shouldn’t be overly optimistic or too upbeat about your financial situation, but it can’t be all gloom and doom either. Within the bounds of honesty you need to communicate that your in a bad financial place. Just as you had to qualify yourself to get the loan the first time, now you have to qualify to get a loan modification in much the same way. You have to prove that you are financially incapable of making your mortgage payments in the manner they are currently structured. Lastly, your going to have to prove that a loan modification will actually improve your situation to the point where you will be an acceptable risk to them.
If the lender decides that your situation qualifies, they will send you a loan modification information packet along with a worksheet to calculate your monthly expenses. Even if you already have it all in your own format, take the time to copy it over to their forms, it will speed up the process every time.

Step 5 – The Negotiation

Remember that the banks don’t want to loose any money, so don’t expect their initial offer to be worth taking. Fully expect that it will take 3, 4, 5 or more offers back and forth until you find one that is acceptable to both you and the bank. In most cases this is the time consuming and frustrating part of a loan modification. The endless calls going back and forth, waiting and waiting on the phone all to end up with a loan modification offer that just insults or angers you is what you should fully expect until you finally reach an agreement that you both can accept.

The average loan modification should result with a 31% debt to income ratio for your home which means your house payment should be around 31% of your gross monthly income. This is all about give and take for both sides. You can expect that the first loan modification the bank offers will actually have your monthly payments increase, for at least a few months. This seems idiotic but it’s true as the banks will initially try to begin with a forbearance agreement which temporarily increases payments because they try to add in any past due payments, penalties, interest and late fees. Don’t accept this, simply let them know you don’t have the ability to meet that financial obligation and you head back to the drawing board. Expect to have to say this several times during the negotiation.

Here is the list of the most common concessions.

• Reduction in interest rate or converting from an adjustable rate to a fixed rate. This can be a permanent or temporary (1-5 years). Some loan modifications reduce the rate down to as low as 2% for a short term. This is almost always the most favorable to both parties and is the most used concession.
• Forbearance Agreement. Expect them to try to add in missed loan payments, interest payments, insurance and other costs the lender paid on your behalf. You should try and fight these costs as much as possible.
• Extension of the length of the loan. You can expect them to extend the loan to 35 or 40 years. This is a toughie for many people, but it is one of the most used ways to reduce your monthly payment.
  Principal Forbearance. Basically they will defer payment of part of your loan and add it to the end of your loan or until you refinance or sell your property. This is commonly referred to as a “balloon payment”.
• Principal Reduction. As stated many times before, do not expect this. Only 2% of all loan modifications done in the past year had a principal reduction, and most of those were done in Michigan and California.

Step 6 – Wrap it up

Once you reach an agreement you can expect to be on a 3 month “trail period” in which if you are current at the end the lender will execute a permanent modification agreement and forward to you to sign.
Sign the paperwork, return it to the lender.

Good luck and if I can be of any further assistance give me a call at (770) 616-5062 or send me an email to alrichard@charter.net. I don’t do loan modifications and will not charge you any money but I can offer my opinion based upon my experience. I do not provide any legal advice and anyone seeking such advice should consult with their own lawyer.

If you can no longer afford to make your monthly loan payment, you may qualify for a loan modification. In essence a loan modification changes one of the variable items in your loan. It could be principle, interest rate, loan terms extended, arm rate converted to a fixed rate or they could forgive any past delinquencies. That said, lowering of the principal amount is very, very rarely done. A loan modification is never guaranteed as it is up to the bank to choose to accept or not.

Do Loan Modifications Work?

Yes and no. Statistically, it depends on the amount of modification you are able to attain. If you just can’t afford the house your in, lowering you monthly payments by 10% to 20% is not going to be the answer. Of the loan modifications written in the past year, only 37% actually resulted in a monthly payment that dropped by over 10%. What is startling is that nearly 25% of homeowners who attempted a modification had a monthly payment increase, which happens when the lenders add fees or past due interests to a loan. So what percentages of loan modifications actually work? If you get a reduction in monthly payments of 10% or more then 1 out of 4 (25%) will still go into foreclosure. If you get a reduction in monthly payment of less than 10% then nearly half of the time the borrower moves into foreclosure.

Please understand that sometimes loan modifications aren’t the right answer. If you have a second mortgage, an interest only loan or you have had a significant reduction in earnings then selling your property at a short sale and finding a rental may be a better option at this point. With second mortgages, loan modifications are very difficult to obtain as a first-lien holder doesn’t need approval to modify the first mortgage, but would have to make a more drastic change in terms if the second-lien holder doesn’t cooperate. If you’re in an interest only loan and wish to begin paying interest and principal, this will result in much higher payments than you have been making.

Who can do a Loan Modification?

You should always attempt to do your own loan modification by working with your lender personally first. I suggest you only consider using someone to assist you if you have attempted your loan modification first and it failed for some reason. Even then I suggest you start with non-profit or government agencies such as www.helpumodify.org or www.makinghomeaffordable.gov. If you are considering using a loan modification company, you need to be very cautious and protect yourself. Remember what each person or companies motivation is. You want to change the terms of your loan, the bank wants to continue loaning you money and they would rather not change anything, if you choose to use a loan modification company, they are looking to make money by assisting you. Remember that the only one who is truly looking out for your best interest first is you.

Additionally you should always be very leery of all loan modification companies. Everyone and their brother is all of a sudden a loan modification specialist and the number of loan modification scams out there is disgraceful. Beware of any companies that claim they can always get you a loan modification, anyone claiming they always get principal reductions and any that require money up front. I am not saying that ALL loan modification companies are bad, but many are so beware.

In truth, loan modifications are difficult to obtain. But this difficulty exists whether the person making the request is a homeowner, a non-profit, government agency or professional loan modifier. Lenders and loan servicers are slow to approve refinance mortgages and modifications because there’s no proof that doing so will improve the lender’s position. Many loan modifications end up in default again within the year. When this happens, the whole process starts over. But if the lender forecloses the first time, the home can eventually be sold, and some of the money can be recouped.

What You Need To Qualify

In January the Feds adopted the FDIC qualification criteria for Fannie Mae and Freddie Mac properties and have encouraged standardization with the banks by making it a prerequisite for receiving TARP funds. The good new and bad news is that you know what it takes to qualify, but if you don’t qualify it can make the entire process very, very difficult.  

If you have a FHA or VA loan, to qualify you must:

• Be 60 days late
• Must qualify with full income disclosure with a 38% debt to income (DTI)
• Must not purposefully fall behind

If you have a loan owned by Fannie Mae or Freddie Mac, to qualify you must:

• Be on time with your monthly mortgage payments
• Have the income sufficient to support the new mortgage payments
• Home must be owner occupied

These prerequisites are only current at the time of this posting. The rules are constantly changing so please make sure you have the most current information possible if you are researching a loan modification.

If you are 60 days behind your options really narrow. Everyone starts calling you for money, lenders may not accept partial payments and foreclosure is threatened and possibly even filed. Here in Georgia we have the fastest foreclosure process in the country.

So what’s the process to apply for a loan modification? Click here for information on how to apply for a loan modification.

This is an easy to understand video that explains in great detail, but also in easy to understand terms how we got to the place we are in the “credit crisis”

You don’t have to be a tree hugger or environmental activist to want to be green.  In addition to reducing your monthly utility bills we have to recognize that the world’s energy sources are not unending.  Here are some ways that will not only reduce your monthly expenses but help to increase your homes value. 

Lighting

In addition to using florescent bulbs whenever possible, there are two other options for efficient lighting… light dimmers and motion sensors.  Light dimmers are switches that allow you to increase or reduce the light intensity in a room.  Be careful when using some dimmers with some florescent bulbs, they don’t play well together.  Motion sensors turn lights on and off automatically by sensing when folks enter and leave a room.  These are more effective when used in rooms that are used less often. 

Insulation

Good insulation is probably the number one way of increasing the energy efficiency of your house.   Insulation is rated upon an “R” value used to measure its ability to resist heat flow.  The higher the “R” value, the more effective it is.  Here are a few tips about insulation.

• One type of insulation maybe thicker or thinner, but if the R value is the same they should insulate equally.

• R value performance testing is done in a 70 F environment with no air movement. Ironically enough, when you need insulation the most you’re generally not in these ideal temperatures or conditions. This can result in the rated house insulation R value being higher than the actual effective R value.
• The average recommended R value of insulating material for basement insulation in North America is R-12.
• The R value in house insulation is substantially lowered when there are any air or water/moisture leaks.
• The standard R value for house insulation varies based on climate and temperature
• 1 inch of insulation is = to 30 inches of concrete.

Windows and Doors

Windows and doors account for 30% of the loss of heating or air conditioning.  Well sealed windows and exterior doors are just as important as insulation for preventing energy loss.    Wood frames are the most efficient in terms of energy loss but require painting or staining to keep them looking sharp.  Aluminum frames are very easy to maintain but are the worst rated in energy efficiency.  The best of both worlds is the aluminum-clad windows that have the easy maintenance of aluminum but the improved efficiency of wood. 

Cooling

Ceiling fans are much more energy efficient way of cooling than air conditioners.  Also using light colored drapes or blinds will help to reflect much of the suns rays away from your house.  You can save as much as 10% a year on heating and cooling bills by turning your thermostat back 10-15% for 8 hours a day.  This can be done without sacrificing any comfort by installing a programmable thermostat. 

Landscaping

The way you landscape your yard can drastically reduce your energy bills.  To provide more shade plant large growing trees, vines and shrubs on the south and west sides of your house.  In addition to adding curb appeal, careful planting of trees can add windbreaks which shield your house from the wind, to prevent heat loss.  Also planting trees or shrubs around air conditioning units can help to keep them cool, but they should not block airflow. 

Use an Energy Efficient Mortgage for your remodel

An energy efficient remodel will result in lower monthly bills but the start up costs are often higher.  If you are planning on remodeling a good option might be an EEM (Energy Efficient Mortgage).  To qualify for an EEM, the money you save on your monthly utility bills must be greater than the monthly repayment of the EEM, and your total savings must also be more than your total costs (including maintenance). When you are granted an EEM, you have 90-180 days to carry out the remodeling work. Additionally, you cannot be granted an EEM if you apply after remodeling has started, or if you apply after any other financing has been granted.  You can find more information on EEM’s here:   http://www.pueblo.gsa.gov/cic_text/housing/energy_mort/energy-mortgage.htm

I got a phone call from a past client who has a ARM (Adjustable Rate Mortgage) that is about to reset and his payments are going through the roof.  He asked me if I know about all the stuff on the news and what it really meant.  I did some digging and found that most of the hubbub really comes down to two programs.  The first is the “Hope Now Alliance” program and the other is “FHA Secure”. 

Hope Now Alliance

The Hope Now Alliance is a group of private companies and the government working together.  They want a five year freeze on interest rates for those who can now afford to keep paying their mortgages, but would be at risk of foreclosure if their adjustable rate mortgage ballooned at the next reset point.  This group is very new… they are only taking baby steps at this point.  The website is http://www.hopenow.com/ but it is not overly helpful yet.  One of the key factors for this program is that it’s only available to those who ASK for it.  So if you don’t contact your lender, someone through the website or call 1-888-995-HOPE then you won’t get any additional information.  If you do contact the number you will be matched up with a HUD approved credit counselor who will help you begin the process. 

FHA Secure

The Federal Housing Administration (FHA) has a program called FHA Secure which gives homeowners with Non-FHA Adjustable Rate Mortgages (ARMs), current or delinquent and regardless of reset status, the ability to refinance into a FHA insured mortgage.  FHA Secure is part of the underwriting process and not an actual loan program.  That means you need to refinance your mortgage to see if you qualify.  With FHA Secure the lender will not automatically disqualify you because of delinquent status on your loan.  Here are the qualifications for the FHA Secure:

• 3% equity in your home
• Sustained employment history
• Your income must meet qualifying guidelines
• You must have a history of timely mortgage payments before the ARM reset
• Your ARM must have reset between June 2005 and December of 2009

If you would like more information about the FHA Secure Program you can visit the FHA FAQ at http://www.fha.gov/about/fhascusqa.cfm.  I can’t tell you who to talk to for your mortgage needs but I can give you a couple folks that I trust and you can use them if you wish.  Travis Evans with Brayden Capital at (404) 713-8662 or Ebony Hairston with First Service Mortgage at (404) 767-1111.  They are both knowledgeable about these programs and can be a source of good information if nothing else.