The real disadvantages of Loan Modifications

There are articles out there that talk about the pitfalls of loan modifications and they are saying things that are just not true. I’m writing this so you know the real disadvantages of loan modifications. Depending on who is writing the article, they will have a different agenda and that agenda favors the writer of the article in many cases.  That is something to keep in mind and with that it will be easier to see through some of the deceptive and manipulative articles out there regarding loan modifications.

First of all, I will attempt to cover some of the so called pitfalls that are really not negative aspects of loan modifications.  Loan modifications have high fees (Truth:  Loan modifications have little if any fees), all back payments must be paid before you can get a loan modification (Truth:  any back payments can be added to the back of the new loan), late fees will have to be paid before getting a loan modification (Truth:   late fees are typically forgiven), your modified mortgage payment could go up (Truth:  your mortgage payment won’t go up unless your dumb enough to sign those documents.  The whole reason the program is there is to lower your mortgage payment), you need an attorney to file your loan modification (Truth:   you can file your own loan modification), there is a lot of paperwork to fill out (Truth:  the application has three pages and the last page requires only your signature and date), and last but not least it will have a negative impact on your credit (It’s Completely not true).

Now that I have some of the myths out of the way, I can concentrate on the purpose of this article. Here are some examples of actual pitfalls that can occur while trying to get a loan modification:

Final Modification Payment is Higher Than Trial Modification Payment

When you request a home affordable modification, you have to include and show proof of your gross monthly household income.  The first part of getting approved for a loan modification is receiving trial period payments for three months.  Loan servicers will tell you it is for three months and this period might last for three months or two years it all depends.  In that period of up to two years your financial situation could have changed.  For example, you could have lost your job, gotten a raise, got a new full time job, got an additional part-time job,  your husband got laid off, you now get more over time hours, your now self-employed, or any number of situations that change your monthly income could have occurred.  When your lender decides to finalize your loan modification, your lender will have you fill out another modification application and it will ask for your current income which could be different from your income when your first started your quest for a loan modification.  Your lender will take a look at your most recent gross monthly income and require that you send them proof of your income.   Your final modification will be based on a percentage of this new gross monthly income which could give you a higher payment than what you were paying for your trial period payment.  In some cases, you could now have a higher payment than what your current mortgage payment is.

Loan Modification Finalized /  Don’t Skip a Payment

So your excited, after all the wait you get your final loan modification documents.  I wouldn’t get too excited just yet, your lender still needs to sign those documents and have them recorded before your loan modification is finalized.  Typically, these documents will come in the middle of the month and the question will arise if you  should make your mortgage payment that is due in 15 days.  Your final loan modification documents say that your new payment won’t be due for 45 days.  This will happen and you can count on it so pay attention so you do the right thing.  People call their lenders and ask the question if they can skip a payment and they will get different answers depending on who answers the phone at their lender’s office.  Most people want to skip a payment and don’t realize they are jeopardizing their loan modification.  This is not like the last time when you refinanced your house.  You should not skip your payment, don’t do it.  After you sign and notarize your final loan modification documents, you mail them back to your lender who has one guy in charge of signing all modification documents.  Who knows when that guy will sign the documents and he might have a deadline that says he has to have your documents signed no later than 15 days before your new payment is due.  He could wait until the 15th of the month to sign your documents but before doing so he checks to make sure that you are current on your mortgage payments and he finds out that you didn’t make your payment that was due on the first.  And just like that, he declines to sign your loan modification documents and by the time you figure this out it is too late.  I have heard this exact scenario several times and don’t know if it is a last minute scam by the lender to deny a modification, but it happens a lot.  If you make that payment that is due on the first of the month and it wasn’t necessary, the worst case scenario would be that it is applied to your new modified mortgage payment.

Chase Bank, Bank of America, Citibank, Wells Fargo and US Bank

The five largest U.S. banks, ranked by assets, are Chase Bank, Bank of America, Citibank, Wells Fargo and US Bank. It’s been proven that our big five are too big to fail and difficult to get a loan modification from.  The U.S. government has been pushing and incentivizing loan servicers to complete more loan modifications through the HAMP program; however, our big five banks go by the beat of their own drum.  The most difficult lender to complete a loan modification through has got to be Bank of America.  I have heard many stories of them giving people the run-around.  I currently have a friend who signed the final modification documents for Bank of America and he was told he could skip a mortgage payment so he did.  He later found out that he should not have skipped the mortgage payment and his loan mod got denied, just like in the scenario I mentioned above.  Now, Bank of America is in the process of foreclosing on his house.  These banks have a lot of customers and might not have enough resources in place for the volume of modifications that they are attempting.  I would like to think that is the only excuse they have but it might be that these modifications are not profitable so they pretend to go along with the government’s program.

Debt Forgiveness Can be Taxable

If the lender agrees to reduce the principal of the loan, the borrower may be liable to pay income tax on it. This is more likely to happen in the case of investment properties, versus primary residences. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring and mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.  This provision applies to debt forgiven in calendar years 2007 through 2012.

A simple example would be if a borrower owed $250,000 on their mortgage for an investment property and the lender forgave $40,000 of it. The borrower might receive a 1099-C tax form showing the $40,000 reduction as income, since it represents money the borrower was given and will not have to repay.

Unemployment Income Can’t be Used for Income on a HAMP Modification

Unemployment income cannot be used for qualifying for the Home Affordable Modification Program.  If there is only one wage in a family’s income and it happens to be unemployment insurance, they will not qualify under HAMP.  However, there is the Home Affordable Unemployment Program which is a  forbearance program for unemployed individuals who receive unemployment benefits.  This is a temporary forbearance program which provides a reduction or suspension of mortgage payments for at least three months while you seek re-employment.

Escrow for Taxes and Insurance Required for HAMP

If you are approved for a HAMP loan modification, you will be required to escrow for your taxes and insurance.  This will not affect a lot of people but will frustrate others who are accustomed to paying their own taxes and insurance.

This article is the tenth of a Do-It-Yourself approach to home loan modifications. Check back often or subscribe to this site to stay tuned for the next article in this series (a new post will come out each week day for a month), designed to help you complete a loan modification on your own, cutting out the middle man, helping you protect your ability to stay in your home for the best price possible, and helping you lower your payments as much as possible. After all, nobody will look out for you as well as you can look out for yourself.

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6 Comment

  1. george says:

    You have some other really good loan modification articles but they took some effort to find. I googled pitfalls of loan mods and got this article and after reading thought it might be nice to have a link at the bottom that redirects to a page with all your other loan mod article links. Just a thought.

  2. You’ve covered some very serious pitfalls that I think a lot of people are in the dark about. I shudder to think what it’s like to be in the position of having to consider this.

    I really hope someone steps forward in the near future with good alternatives to Loan Modifications, or we could be seeing an even bigger real estate crisis soon.

  3. I have been in the process of attempting to obtain a loan modification. After 2 years, from Countrywide to B of A, the loan modification papers went out with only 7 days to sign before they expired. The payments were 20% higher than the original payments. With the financial information I gave to the bank I challenged them to prove the ratio’s …as there’s no way I qualified for that payment. The bank refused to provide the worksheet and has not foreclosed on the property, yet has sent me over 10 applications to fill out. this will be the 4th loan modification application i have filled out. I have a 6 bedroom house. I rented the rooms out and they said I had too much income…after they told me i didn’t have enough which is why I rented them out to begin with. I am now attempting once again, to get a loan modification , however, without a principle reduction it doesn’t make sense.

  4. John says:

    Commenting on they May 11 post by Sharon, I am also with BofA who bought my Countrywide mortgage. I just received my loan mod trial plan documents today and was shocked at the payments they are requesting. I was on an interest only loan and the new payments are TWICE what I was paying without including escrow. So what’s the point?

  5. Mark says:

    In regards to John’s comment. I am in the same boat. I just got the paperwork for my 3 month trial period through BofA and it’s $600 more a month than what I was paying before. What to do? I contacted the representative that was assgined to our loan and she said “do you think you can make the payments?” and I said…”i have no choice, but it’s an incredible stretch for me…” she said that while she couldn’t guarantee it, she thhinks the payments will go down after the 3 months. Still quite discouraged….

  6. Taylor says:

    Hi, I applied for a HAMP loan through bank of america. It was denied according to them for making too much money. I appealed. During the appeal I was mailed a Fannie Mae remodification 15 days later i was mailed a HAMP remodification with a 3 month trial period. I didn’t even notice there was a difference since the payments were about 6.00 apart. I paid the higher one not knowing we had been approved by HAMP. Noticed the difference right around my 2nd trial payment. (fast forward) after my 3rd trial payment I was sent the final paperwork. It basically lowered my payment by about $250.00 per month. They took the late payments and added to the back of the loan. They did not change the years but changed the interest rate starting about 3.75 for the first 5 years it goes up from there ending in year 22 to 4.75%. The perm paperwork says sign her but WAIT they don’t tell you to make sure you have it NOTARIZED. So I found a notary about 8:00 p.m. in AZ to notarized our docs since I had a deadline to get them to BofA. Now, I have mailed them by overnight in time but keep getting calls to set a signing appt with a rep. BofA said everything is in good order but why these calls? I’ll make the 4th payment in Oct but I just wish the final would be approved and signed off on.

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