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Top 10 Loan Modification Myths
Relief is available for homeowners facing the prospect of losing their home in foreclosure, but for some reason far too many are reluctant to pursue their options, including loan modification. In many cases, people are simply confused or misinformed. In other cases, they have had such bad experiences with their lenders or bill collectors and attorneys, that they are hesitant to trust anyone who offers assistance. The reality is help is available to homeowners through the loan modification process. For homeowners who qualify, lenders are able and often willing to modify the terms of the loan and even in some instances reduce the balance to make the monthly payments more affordable.
Unfortunately, homeowners often mistakenly think they cannot possibly qualify for such a program or just never take the first step in finding out if they do. We have created a list of the top 10 myths surrounding loan modification to help you take the first step in improving your situation.
Myth #1: I need an attorney to modify my loan.
The truth is you do not need an attorney to modify your loan. However, a qualified attorney who is experienced in real estate litigation is much more capable than most people at negotiating the best possible deal. Experienced attorneys know what the lenders are willing to negotiate and what other home owners are receiving, because they have worked with the lender before and other lenders in the industry. Attorneys also understand the law, and carry more legal weight than consumers. An experienced attorney knows how to spot violations in the “truth in lending” documents, and with a the threat of a possible law suit at the negotiating table, the lender is usually more willing to negotiating the best deal.
Myth #2: You should not pay up-front fees for a modification.
Not paying up-front fees is a great way to protect your self from being taken advantage of, particularly involving credit counseling services and some companies that offer loan modification services. If the loan modification company is offering legal representation, however, the rule of thumb changes. Attorneys almost always charge up-front fees in the form of a retainer. An attorney is not going to start on legal proceedings without payment. Make sure the company has a mailing address, (not just a P.O. BOX number or website address) and a direct phone number to the supervisor. Do some checking to see if the company has any complaints and if they have successfully negotiated loan modifications for their clients.
Myth #3: You must have excellent credit to qualify for a loan modification.
Credit score has no bearing on whether or not you will be approved for a loan modification. Unlike the option of refinancing, loan modification adjusts the terms of the loan and could reduce the balance owed. Credit score is used to determine credit worthiness for new loans, not modifying existing. A successful loan modification can actually improve your credit score over time, because it will allow you to make your payments on time, avoid foreclosure and bankruptcy.
Myth #4: I am in foreclosure already, it’s too late.
As long as the home has not been sold and you still reside in the residence it is never too late. You may still have enough time to start a modification, but time is of the essence. An attorney can stop the foreclosure proceedings and buy enough time to successfully complete a modification. The sooner you take action the more options you have available, and the more time you have to pursue the best option. By having an attorney contact your lender on your behalf, you can show a good faith effort to work out a solution. This will buy you more time to negotiate a successful modification.
Myth #5: I am not late on my payments so I don’t qualify for modification
Up until a few months ago this was true. Some requirements stated that you had to be at least 61 days delinquent to qualify for a modification. Over the past year eligibility requirements were constantly changing, and now lenders are working out loan modifications with borrowers who are up to date on there payments. One of the keys to completing a modification for the borrower who is current on there loan is showing a genuine hardship with imminent risk of default. This is definitely a situation where a qualified attorney is needed.
Myth # 6: I can only modify the loan on my primary residence.
Loan modification is designed for homeowners not investors, so you have a greater chance of completing a successful modification on a home you actually live in. Lately the mortgage lending industry is so bad that lenders cannot afford to have bad debt on there books. Each time a loan goes into default it makes the lender look worse, so they are willing to work with investors in renegotiating their loan agreements as well.
Myth #7: Loan modification is my only option to save my home.
There are other options available to you other than loan modification, although modification is usually the best. A short sale will allow the borrower to stay in the home while the house is put up for sale on the market. The lender usually agrees to sell the house for less than what is owed, but once the property is sold, the homeowner must move out immediately. Another option is a forbearance plan, in which the lender will temporarily reduce or delay payments for a specific period of time to allow the homeowner to get their assets in order. After the forbearance period is over the borrower must repay the amount owed and continue to make the payments again. There is a last option called “deed in lieu of foreclosure.” This option should be used once all other options have been exhausted. Instead of going into foreclosure and taking a bad hit on your credit, you can do a deed in lieu of foreclosure and sign the deed back over to the bank. You can walk away from the property and your credit will not have a foreclosure on it, rather a voluntary foreclosure which affects your credit less.
Myth #8: Lenders do not have to negotiate with me if they don’t want to
Lenders often feel compelled to negotiate with borrowers because they do not want to have bad debt on there books. Once they have too many bad loans, there reputation in the banking world suffers and they may have trouble borrowing money to make future loans possible. What most people do not realize is most loans that are in default contain evidence that the lender or someone else involved in approving the loan acted inappropriately which is against the law. In cases like this, the lender is obligated to re-negotiate the loan agreement with the borrower. A knowledgeable attorney will perform a forensic loan audit that often uncovers one or more RESPA (Real Estate Settlement Procedures Act) violations that most borrowers would never notice on their own.
Myth #9: I should work directly with my lender
Many banks will tell homeowners to work directly with them and not to use a third party attorney. The lender has attorneys working hard on there side, you should to. A mortgage is a legal document, and there are laws regarding what must be disclosed and what is allowed. In many cases these laws are not followed, and a forensic loan audit done by a qualified attorney can uncover these violations. An important thing to remember is banks are in the business to make money. They are the ones that put millions of people in subprime mortgages and adjustable rate mortgages knowing that when the payment adjusted, the borrower would not be able to afford them. They are the primary cause for this recession we are currently in! Now, out of the blue they are here to help? Why leave it up to them to fix the situation they put you into in the first place? If you work with a qualified attorney he will be able to negotiate the best possible deal because he has negotiated with most lenders already and knows what they will and will not do.
Myth #10: I would be better off walking away from my home and declaring.
Walking away from the home and filing for bankruptcy are two options, but they are rarely the best options. If you simply walk away, your lender is unlikely to pursue any legal action against you, but in some cases, the lender can pursue a deficiency judgment against you to collect the difference between what you currently owe on the balance of the mortgage and what the property was sold for at auction. Filing for bankruptcy is only the correct option when you have an overwhelming amount of debt that even if you make payments on for the rest of your life you could never pay it off. Even with bankruptcy if you want to keep your home you will still need to make the regular payments. Bankruptcy will also leave a bad mark on your credit for at least seven years which will make it difficult to borrow money in the future. A successful loan modification is almost always a better choice.