Writing Your Own Bailout Plan with a Loan Modification
Writing Your Own Bailout Plan with a Loan Modification
By Ralph R. Roberts, GRI, CRS
In Washington, politicians are tripping over themselves to bail out corporate America and Wall Street. In the meantime, nobody seems to have any sense of urgency for dealing with the looming problem on Main Street – the worst foreclosure epidemic since the Great Depression.
Fortunately, the folks on Main Street are doing what they usually do when the government fails to address their needs – they take matters into their own hands. More and more distressed homeowners are writing their own bailout programs via loan modifications. For qualifying homeowners, lenders can (and often must) modify the mortgage loan to accomplish the following:
- Lower and fix the interest rate
- Extend the term
- Decrease the principal due
- Roll any delinquent payments into the principal
- Forgive any late-payment penalties and fees
- Re-amortize the loan to make the monthly payments more affordable
If you’re currently in default with missed or late payments but are not yet officially in foreclosure, you may be able to write your own ticket, as well, by negotiating a loan modification with your lender.
Do You Qualify?
Not everyone facing the prospect of losing their home qualifies for a loan modification. Your situation must meet the following requirements:
- 12-month rule: 12 months must have passed from the loan origination date.
- Owner-occupied only: If you’re not living in the home, forget about it. Loan modification is for homeowners, not investors.
- You cannot have another FHA-insured mortgage: Again, loan modification is intended to provide you with a place to live, not to bail out real estate investors.
- 61-days delinquent rule: You essentially need to have missed your last two full monthly payments.
- Proof of hardship: You need to show a loss of income, an increase in leaving expenses, or both. Qualifying hardships include the following:
- Temporary job loss or job relocation
- Seasonal job
- Divorce or separation
- Reduction in household income
- Medical bills
- Victimized by predatory lending practices
- Unable to sell or refinance
- Loan payment increase
- Military service
- Death or illness in family
- ARM with rate scheduled to adjust in next 60-120 days
- Evidence That You Can Afford the New Lower Monthly Payments: You need to have sufficient income to cover a lower, but reasonable monthly payment. If you’ve been laid off indefinitely and have no source of income, you’re not going to qualify.
- Keeping the New Loan in the First Lien Position: The new terms must not cause the first mortgage to become a second mortgage, for example.
- Foreclosures need not apply: If you’re currently in foreclosure – your lender has served you with a notice of default or posted a foreclosure notice in the local paper – you don’t qualify.
Finding a Reputable Loan Modification Company
You can find dozens of loan modification companies on the Internet or through advertisements, but the best way to find reputable professionals is through referrals. If you have a friend, relative, or associate who’s been in a similar predicament and used a loan modification company to save their home, ask for the company’s name and contact information and how satisfied they were with the services they received.
Consider asking other real estate professionals in your area for recommendations, including real estate agents, attorneys, accountants, banks, and title companies. These sources can often lead you to the best in the business and help you avoid the worst.
Checking a company’s credentials and references
When you begin your quest for a loan modification company, search for companies that meet or exceed the following criteria:
- Phone number and street address – not just a Web site, P.O. Box number, and toll-free phone number
- Solid industry reputation and transparency
- BBB (Better Business Bureau) member in good standing or a member of other consumer-friendly organization (including your local Chamber of Commerce)
- Real customer testimonials of prior success in negotiating loan modifications
- Professional designations – licensed, insured, member of reputable industry associations
- Professional affiliations – team members with distinctions and education such as lawyers, real estate professionals, and so on
- Track record for promoting industry regulation and oversight
- Companies that offer educational resources, an honest Web presence, and clear, detailed explanations of the problems and solutions
- Favorable refund policies or no up front fees. Up front fees are common and not a red flag if you’re dealing with attorneys or a law firm.
Watching for common warning signs
Remain on the lookout for the following warning signs:
- Pure salesmanship, no substance, just a shell game
- Compliance or regulatory complaints filed with and verified by reputable organizations, such as the Better Business Bureau or a state regulatory agency, not simply a disgruntled consumer posting a rip-off report on the Internet
- Inability of representatives to answer questions
- Lack of straight answers
- Undercapitalized start-up companies simply trying to cash in on a crisis
- Companies that encourage you to act on emotion or fear rather than make informed decisions
- Companies with cheap or shoddy looking Web presence – if you see a page with Google ads, run the other way
- Companies that can’t, don’t, or refuse to explain the process and services they perform
- A one-size-fits-all approach – they should ask you plenty of questions before offering a solution
- Companies that pirate reputable company’s resources and copyrighted materials
- Companies that guarantee results or make wild claims – offering a money-back guarantee is acceptable, but nobody can guarantee success
- Large up-front fees with an unclear or no refund policy
Trust your instincts. If the company seems shady or its claims seem too good to be true, cross it off your list.
Tip: If a company reviews your case and says it can’t help you, don’t judge them harshly – they may be the only trustworthy company of the bunch. Some companies make promises they can’t deliver on just to get you to hand over your money.
Patience Is Key
Assuming you’re working with a reputable company, you need to trust your representative to do her job, keeping in mind that delays are common. Your representative may contact the lender by phone, fax, and email and not get a response for several days. Be patient. Don’t call every hour or even every day demanding immediate results. However, you should contact your representative occasionally to check the status of your case and make sure everything is on track. If you’ve heard nothing over the course of two or three weeks, you should definitely call to find out what’s going on.
Tip: When you first talk with your representative, ask for a timeline and request an explanation of what you can expect in terms of how often your representative will contact you. Moving forward with realistic expectations can often ease the frustration.
Rewarding Good Companies with Referrals and Testimonials
If you had a great experience with a loan modification company, tell others about it. Whenever you’ve dealt with someone who is reputable, did what they said they would, and achieved results, you should let the world know that this is a good company. In addition to helping the company, you help any friends, family members, and acquaintances who need the same services.
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About the Author: Ralph R. Roberts, GRI, CRS, is a real estate-focused consumer advocate, blogger, and the award-winning author of numerous books, including Foreclosure Self-Defense For Dummies and the forthcoming title Loan Modification For Dummies (available summer 2009). Ralph is based in Sterling Heights, Michigan, and can be reached here.