Mortgage Modification: Pitfalls to Watch Out for

Mortgage modification is among the biggest industries to have sprung up from the real estate crash. With government backing and widespread participation from lenders, it has become the solution of choice of many homeowners looking to save their homes. But just like any financial offer, mortgage modifications have their share of weak spots. And when it’s your home at stake, you’ll want to put a bit more effort into your choices and make sure you play it safe. Here are some of the most common weak spots of loan modification and how they can be avoided.

You can only try once. Borrowers who get denied a mortgage modification cannot file a second application. However, surprisingly few borrowers know this, and send off their application kits with missing documents or poorly drafted letters. For a major investment like real estate, the last thing you want is to take chances.  

Plan your first attempt carefully—work with experienced professionals and don’t hesitate to invest in good service. And once you get your mortgage modification, make sure to go over all the rules. Sometimes, an attractive offer may actually include hidden costs that don’t really help, and may even push you further into debt.

Lenders don’t have anything to gain. While the program offers incentives to lenders who facilitate loan modifications, sometimes it still makes more financial sense for them to foreclose or agree on a short sale. After all, if you’ve been behind on your payments, they don’t want to risk losing more by keeping you on board. That’s why the requirements are tight and the rules for staying on the program are stricter than in regular loans. A good mortgage modification attorney can help you negotiate more efficiently. Look for ways to convince your lender that modifying your loan makes more sense than foreclosing.

There’s a high rate of fraud.
Mortgage modification companies have turned up by the thousands as the housing crisis tightened its grip on homeowners. But with this fast spread comes a real risk: thousands of homeowners have been tricked into paying companies that don’t really do anything to help. While the government has put in steps to prevent mortgage modification fraud, the best thing to do is still to choose wisely. Upfront payments are the first sign of a loan modification fraud - if someone asks you to pay before doing anything to help you, turn your back immediately and look for another company.

Countrywide Loan Modification: Things to Remember

Countrywide Financial, now known as Bank of America Home Loans, is one of the biggest players in the mortgage industry. In 2006, the height of the sub-prime mortgage boom, Countrywide loans accounted for 20% of all mortgages in the U.S. So it’s not surprising that as the housing market slowed, Countrywide loan modification has received a lot of interest from troubled homeowners. If you have a Countrywide loan that’s in default, this guide offers useful tips on getting a Countrywide loan modification and steering clear of foreclosure.

Proving financial hardship
One of the first requirements for a Countrywide loan modification is financial hardship. You must prove to the agent that your default was caused by inevitable circumstances, such as job loss, medical emergencies or military service. Everything should be contained in a hardship letter - a letter that explains the circumstances of your default and how the loan modification can get you back on track. Make sure to provide solid proof of your hardship: medical bills, contracts, or a confirmation from your employer.

Gathering documents
Many people who qualify for a Countrywide loan modification don’t make it past the trial period because of missing documentation. This has prompted the FHA to change its rules so that all the paperwork is required upfront. Before making that first call, make sure you have everything you need to paint a clear picture of your financial situation. Gather bank statements, credit card and mortgage bills, utility bills, tax forms, and income stubs for at least the past two months, and make sure they’re consistent with your claims.

Budgeting for the future
The bank will also want to know how you plan to stay on track after being given a Countrywide loan modification. The loan may be affordable at the moment, but will you be able to keep it up? Provide proof that you can maintain the loan in the long run, not just for the trial period. A loan modification attorney can help you write down your expenses and create a reasonable monthly budget. That way, you can set realistic goals and know when an offer makes financial sense.

Remember, a Countrywide loan modification is only as effective as you make it. Make the most of the system by following the rules and working with experienced professionals. With careful planning and execution, you can get your loan modified, regain financial stability, and start living on your own terms once and for all.

Loss Mitigation and Lending Under the FHA Rule Change

The Federal Housing Administration (FHA) made significant rule changes last week that can affect its current and future mortgage borrowers, as well as those seeking loss mitigation assistance from FHA-backed lenders. The changes involve an overall tightening of its lending standards, as the agency met a serious crunch as a result of the recession and housing crisis.

Higher cash-downs
The most significant change is the increase in the mortgage insurance premium to be paid upfront. Where borrowers previously paid 1.75% of the loan amount as the one-time premium, they now have to put down 2.25%. However, the option to pay insurance in monthly premiums is still open. The FHA is also proposing an increase in the cap for annual premiums, which is currently 0.55% of the loan amount.

Minimum credit scores
Previously, any borrower could get an FHA mortgage with only a 3.5% down payment. Under the new rules, however, borrowers would need a credit score of at least 580 to get these terms. Otherwise, the minimum down payment will be set at 10%. For homeowners currently receiving loss mitigation help, such as loan modification, this can affect their chances of getting home financing in the future.

Stricter terms
Homeowners who qualify under these new terms will also have to deal with tighter lending terms. Lenders may impose tighter penalties on missed payments and raise their standards for approving potential borrowers. Loss mitigation options may also be limited for people with poor credit to start with, and common solutions such as loan modification may be harder to obtain except under the government program.

Seller assistance
The limit for seller concessions—a form of financial assistance extended by sellers to their buyers—will be reduced to 3% from a previous 6%. This can be in the form of shared closing costs or upgrades to the property. The practice, which helps homeowners sell their homes without lowering their price, puts the FHA at greater risk by effectively inflating the home’s appraised value, according to Stevens.

Lender monitoring
The FHA will also put a closer watch on lenders, particularly the “outlier” companies that originated the sub-prime loans that put the industry under water. Stevens said he is focused on finding and stopping these lenders through intense monitoring procedures, including the online reporting of lender performance rankings. He has also urged Congress to take action against lenders whose loans do not meet FHA guidelines.

Real Cost of Home Loan Modification

For most homeowners, the general idea is that home loan modification will save them money and help them get back on their feet. What few of them know, however, is that there are costs associated with loan modification, and that sometimes the savings aren’t really worth the price. More importantly, few realize that not all home loan modification companies will give them their money’s worth.

So what really goes into a loan modification? How much of the price is worth paying if you’re a struggling homeowner? This guide shows you some of the costs you can expect.

Loan modification fees
First of all, there are fees for the loan modification itself—basically a fee for the lender who goes through all the trouble of opening your file and crunching your numbers. This amount is decided on by the bank, and according to recent studies, can range anywhere from $800 to $8,000. Make sure to ask for a breakdown of the costs—more often than not, there are lots of steps you can save on by doing them yourself.

Service fees
A lot of paperwork goes into a home loan modification, and with thousands of borrowers coming in at a time, the costs can quickly add up for the bank. While the services are less expensive than loan modification fees, they usually have to be paid upfront and may not be given back if the loan modification isn’t approved. Service fees can be as low as $400 in some banks and as much as $1,500 in others.

Third-party assistance
Many homeowners choose to work with a home loan modification attorney to negotiate with the bank on their behalf. This speeds up the process and takes a lot of weight off the borrower’s shoulders. However, it also tends to be expensive: companies charge anywhere between $3,000 and $8,000 for a home loan modification. If you think the time and effort it saves is worth the price, then working with a lawyer may be a good choice.

Besides the financial costs, there are also other consequences to consider before deciding to get your loan modified. For example, a home loan modification requires a heavy investment in time—as much as 12 hours of phone calls, filling out paperwork, and gathering financial documents. The effect of the home loan modification on your credit score and taxes should also be taken into account.

At the end of the day, it’s still a case-to-case basis: if you think the amount of time, effort and money you put in is worth saving your home, then a home loan modification is a good choice for you.

Mortgage Modification & Credit Score

Does a Mortgage Modification Affect Your Credit Score?

Mortgage modification has grown significantly more popular in recent months, a result of the housing crash and the spate of mortgage defaults that followed. But while it has helped a good number of homeowners, many are still reluctant to get a mortgage loan modification. One of the main reasons is its potential effect on one’s credit rating over the long term.

Sure, it’s not as damaging as a short sale or a foreclosure, which can stay on your record for up to ten years. But in a credit-conscious society, a drop in your credit score can have major effects in your lifestyle. So how does a mortgage modification really affect your credit score, and what can you do about it?

Circumstances of default
The first thing to keep in mind is that by the time you apply for a loan modification, there may already have been damage to your credit score. Because modifying means accepting less profitable terms, most banks require you to be at least a month behind (sometimes even more) to qualify for a mortgage modification. But each payment you miss ends up on your credit report, and even if a loan mod gets you back on track, it’ll still take a while to clear it up. So your first step should be to call up your lender and know their policies—and decide whether the new terms are worth the added delinquency.

Reporting policies
Another important factor is how your lender views the mortgage loan modification. Some will consider your loan reinstated and carry on as normal, but others can report it to the credit bureaus as a negative mark. So while you do save money upfront, you may have to pay for it with a sharp blow to your credit score. Banks rarely bring up this matter with their borrowers, so it’s your job to inquire - call up the Loss Mitigation department and simply ask how mortgage loan modifications are reported.

Your credit requirements
For some homeowners, a reduced credit score is actually a fair trade-off considering the money they’ll be saving. If you don’t plan on taking out new loans in the next few years, a mortgage modification may be worth the credit score drop. Consider your future credit requirements: will you need a new credit card, a car loan, or a student loan in the years to come? If you think you’ll need that score before you’re fully back on track, try negotiating with your lender or ask about more credit-friendly alternatives.