Loan Modification Programs: What Banks Aren’t Telling You
So you’re searching for information on Loan Modification Programs and all you find are sites looking to sell you their services and/or non-profits with generic information on loan modifications and program requirements.
Well, you’re in luck, because today I am going to give you the truth about loan modification programs…and what you’ll discover in this article may shock you. Read this article carefully before you go off and apply for a loan modification.
First of all, let’s clear some of the biggest myths that exist out there in the industry right now.
1. You do not need to pay for a loan modification. You can do a loan modification on your own with your bank if you can speak mortgage terminology, are experienced with negotiations & can present your arguement like an investment consultant (this is not an exaggeration).
2. You do not have to be current on your mortgage in order to qualify for a loan mod. Bank representatives will often tell you that in order to be considered for a loan modification, you have to continue making your payments. This is absolutely false and quite counter productive.
3. Just because you qualify for MHA (HAMP) and/or 2MP does not mean the lender is going to give you a permanent mod. Often times, homeowners will get “preapproved” for a mod, strung along for 3-12 months just to get nothing more then a temporary reduction in their payments, almost like a mini-ARM. Did you know that in 2009, out of 1,032,837 MHA trial modifications, only 31,382 became permanent?
4. MHA, HAMP, HAFA & 2MP are not the only programs available to homeowners, so just because you get rejected to these programs does NOT mean that you CANNOT get a modification. There are what experts call “internal programs” that are basically private modifications made available by the investor (who owns your mortgage note) on a case by case basis.
So let’s briefly discuss the two major loan modification programs out there and their requirements:
MHA (Making Homes Affordable): MHA is widely known as Obama’s Financial Stability Plan and is the birthplace for programs like HAFA (for Deed-In-Lieu & Short Sale Customers) & HAMP (for Loan Modification Customers).
HAMP (Home Affordable Modification Program) has the following blanket requirements:
1. Home must be a primary residence
2. Your mortgage note must be less than 730k
3. You must be able to document financial distress
4. You obtained the mortgage before 2009
5. Your mortgage must exceed 31% of your gross monthly income
6. The bank must participate in MHA
The reason why I say “blanket” requirements is because most homeowners do not bother to consider the fact that banks are flexible and open to negotiate terms as long as you know what presses their buttons. For example, you can negotiate a loan modification for rental properties (non primary residences).
So don’t make the mistake of simply giving up on your loan mod just because you don’t qualify for MHA or HAMP and some customer service agent runs your numbers and tells you that you’re not qualified. Just because you get rejected for these programs does not mean that you cannot obtain a loan modification. We will get to this later when we discuss the mysterious “internal loan modification program.”
2MP (2nd Lien Loan Modification Program): This program requires lenders who participate in HAMP to also offer modifications for 2nd loans. Now don’t be fooled, this does not mean that lenders are required to offer you a permanent modification at desirable terms. Rather, they are simply required to make the ”offer,” which is a very big difference. Here are the following blanket requirements for the 2MP Program:
1. Same requirements for HAMP
2. Can’t be subordinate to a 2nd lien, neither can the loan be a HELOC in 1st position
3. Can’t be on a 2nd loan where no interest is charged and no payments are due until the first lien is paid in full
4. The loan cannot be insured, guaranteed, or held by a Federal government agency (e.g. FHA, HUD, VA, and Rural Development).
5. 2012 is the current deadline
While this is a great opportunity to further reduce their payments (by modifying their 2nd loans as well), just because one is qualified for 2MP does not mean that a permanent modification will be given.
What most homeowners must understand is that lenders will do anything & everything to keep you from modifying your loan while keeping you current. While they may be more then happy to offer you a trial modification, converting that trial mod into a permanent mod is a direct result of aggressive negotiations & understanding the banks alternatives in the event of foreclosure (aka their “hot buttons.”) Before we go into this further, let’s talk about a 3rd and often overlooked program that most homeowners know nothing about.
The Mysterious “Internal” Program
So what is the mysterious ”internal” program? It is a privately negotiated loan modification where terms are approved or disapproved by the “investor” on a case by case basis. Who is the investor you ask? This could range from Freddie Mac, Fannie Mae to some other major lender that you don’t even bank with.
Internal programs are what you want to pursue in the event that you do not “qualify” for MHA/HAMP and/or 2MP. You may be surprised at how many homeowners are initially rejected from these government-mandated programs. This is most likely due to the fact that customer service agents will run your numbers in a way that causes there software (yes, literally) to reject your proposal for a loan mod.
Think about it. Do you really believe that banks are that anxious to permanently lose money on your mortgage? NO WAY. Therefore, be wary when you are easily approved for a modification because most likely you may be getting strung along for a temporary modification and not the real thing.
So by now you might be asking, “what are the requirements for an internal modification program with my lender?” Well, here are some general rules of thumb:
1. Know exactly what you are doing. Don’t waste your time trying to adjust your mortgage payments to 2% of your gross monthly income or something ridiculous like that.
2. Understand foreclosure law as well as your states position on deficiency judgements before you aggressively negotiate your loan mod. Before you negotiate terms, make sure you understand your alternatives as well as the banks because if you don’t, your lender could very well foreclose on you & pursue you for a deficiency judgement, causing you to lose your home as well as your sanity for the next 5-10 years.
3. Be able to speak to your lender like an investment consultant. Discuss the value of your home, what your property would sell for as an REO or at the auction and remind your bank about the cost of foreclosure or repossessing properties for the purpose of selling as an REO. You need to be able to frame your proposition in the best light as possible, and you can do so by essentially “down playing” your bank’s alternative choices.
4. Arrange your finances in a way that does not overestimate your income & underestimate your expenses. Have a well written hardship letter, be organized and do not give the impression that you do not know what you are doing, since an experienced loss mitigator will smell a “newbie” from a mile away.
5. If you aren’t capable of fulfilling the above requirements, pay someone else to do it. With what money you ask? Well, if you default on your payments for 3-6 months,you should have more then enough money to pay for decently-priced loan modification service. Spending what you would usually pay on your mortgage to get your interest rate and payment amount reduced permanently is a great deal in my opinion.
“..Kevin, I want to talk to you about my property and my loan modification. Do you recommend pursuing one on my own, using a HUD agency or a loan modification company? I also want to find out whether I qualify for an internal program..”
This seems to be the question of the day. Let me be clear. I am a licensed Short Sale expert, not a loan modification consultant. I personally am not a fan of homeowners doing modifications on their own or with a HUD agency unless they themselves are willing to prepare the package, present an arguement and aggressively negotiate with the lender until they reach a permanent modification with terms that are agreeable to both parties. A homeowner should expect to easily spend a few hours a week for 3-12 months pursing a modification.
Your goal, when pursuing a loan modification, should be to quickly circumvent a trial modification and get yourself a permanent modification at the expense of the lender. That is about the simplest way I can explain it.
My personal recommendation is to get expert consultation with a Loan Modification company with a large track record and stellar closing rate. Talking to an expert will help you avoid wasting your time & energy taking the wrong approach with your bank. There are about 4-6 major factors as well as 100+ secondary factors that affect your ability to obtain a successful loan mod. So be smart, get advice.
So get yourself some help, get your loan modified and start saving money. There are more programs available to you then you might think. You (or your hired agent) simply need to dig deep enough to find them.