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Mortgage Loan Modification Myths Exposed

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There are plenty of mortgage loan modification myths floating around that are assumed facts, especially with so many upside down mortgages caused by the housing market crash. A lot more homeowners qualify for a mortgage modification than lenders are letting on.

MYTH: You cannot modify a loan if your home is upside down. 

FACT: While you may not qualify to refinance if your current loan to value is upside down, that is not a factor for modifying a loan.You are not asking for a new loan. You are asking to restructure the loan you currently have. This does not involve re-qualifying. The same goes for credit score.

However your income and expense documentation does need to demonstrate you can afford the mortgage loan modification you are asking your lender to grant you.

MYTH: You cannot modify a loan unless you are behind on payments.

FACT: While your lender may tell you they only do mortgage loan modifications if you are two or three payments behind, that is just untrue.

What is really happening is that your lender is putting you off and hoping you will continue to make payments. As far as the lender is concerned you have made payments up till now, so if they can brush you off with a quick "no," then they will.

You do not have to be lying on the floor bleeding to get help. You just need to get the lender's attention and get them to take you seriously. The fact that you have made all your payments actually shows that you are a good candidate for help. You will continue to pay on time if you can afford the payments. Lenders can be convinced of this — but you have to get their attention and get them to take you seriously.

It is possible to negotiate mortgage loan modifications where the homeowner has never missed a payment or been late.In fact most of my personal clients are current and their lender previously said they did not qualify.

MYTH: Investment properties do not qualify for mortgage loan modifications.

FACT: I do not know where that idea came from but I will answer that in one word: POPPYCOCK! (Or is that two words?)

A loan is a financial transaction with a lender. Your lender does not care what you spend the money on (short of fraud) if you pay it back with a profit. If you cannot pay it back, the lender only wants his money.This is where mortgage renegotiation with a mortgage loan modification steps in.

You borrow $500K to buy an investment property. That property is now worth $250K. If the lender forecloses, they would be lucky to recover $250K if they can sell right away.

More likely the lender will end up with an empty property for months or years. An empty property pays $0 and the lender now has to pay someone to care for and sell the property. Those costs are going to come out of whatever the property sells for.

What if the property continues to go down in value? How much of the $500K is the lender likely to recover? The lender can be convinced to do something in their best interest. This gives you a lot of room to negotiate a mortgage loan modification.

Bottom line: the lender will make more money if you keep the investment property and continue to make payments, even if you are paying less. You are looking for positive cash flow on your property — so is your lender.

MYTH: You cannot do a jumbo mortgage loan modification.

FACT: (First, see the fact above.) I do not get many properties over $1,000,000 but these are properties that lenders foreclose on fast. If you are behind two payments, you will likely hear foreclosure threats and may get a notice of default filed at the court house.

Lenders also negotiate and modify fast on jumbo loans, if you are behind on payments. (Note: not all lenders are fast, but they will handle jumbo loans faster than smaller loans when behind.)

MYTH: Call your lender; they will help you modify your mortgage. 

FACT: Honestly, sometimes they do and sometimes when they do your modified payment is higher.

It also depends on how long you are willing to sit on the phone to make repeated calls and wait on hold. Congresswoman Maxine Waters (D-CA) was willing to sit on the phone but did not find that lenders very helpful.

“The average American trying to negotiate a loan modification will not be able to get it done,” said Waters. “It will be impossible for them to get in touch with the right person, and even if they get in touch with a so-called counselor, they have a cookie cutter kind of direction that they go in.” She no longer believes that myth.

Many people who call their lender for help are given a repayment plan instead of a mortgage loan modification. This means they have to make their regular payment plus make an additional payment to catch up. What kind of help is that? The homeowner already could not make payments, why would they now be able to make a larger payment? Some people lose their home because they believed this myth.

MYTH: If you do not fit the Making Home Affordable guidelines you cannot get a mortgage loan modification.

FACT: Lenders have been doing mortgage modifications when it makes financial sense to them before Congress stepped in. Many borrowers will be helped by the government guidelines. Many more will not. For those who fall outside the guidelines it may still make financial sense for the lender to restructure the loan. Most of my clients fall outside those guidelines and do successfully restructure their loans.

Lender participation in adhering to government guidelines is voluntary. You still have to negotiate and convince your lender that a mortgage loan modification makes financial sense for them. You will have to demonstrate and document that you can afford the payment you are asking for. If you cannot, you will need to use another option.

The good news is that there are other options and it still may be possible to stay in your home.

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  • Patricia

    Is it true that you cannot qualify for a loan modification if you have a Texas Home Equity Loan?

  • DP

    Jolene- Thanks for the advice. Here’s my situation in brief: bought my house for 128k when it appraised for 133k in 2007. Now, I owe 124k and it’s appraisal has now went to 121k. UPSIDE DOWN… Whats your advice? I’ve been offered to refi without an appraisal by my lender, but I don’t think the $80/month is going to be worth adding the $3k in closing costs to my mortgage. How can I get out of this situation? I’d love to sell it, but I’d have to sell below what I owe… Help Please.

  • jolene

    While it is voluntary for the lender/servicer to participate in the government program — if they choose to participate [which they do in order to get govt stimulus payments] then they have to follow the rules of the program.

    Or, rather, they are supposed to, but there is nobody to make them do it, so they don’t. So the lender/servicers go on making up their own rules as they go along — making it a living hell for borrower’s who are trying to comply, making borrower’s jump through hoops over and over and over again, sucking money out of them for [ha, ha] the 3 month “trial payments” that go on ad infinitum.

    Learn about the program. Read the rules. Know your rights. Go to http://www.hmpadmin.com. Spend time on this site. To get to the Supplemental Directives click “Programs” on the top blue menu bar, at the bottom of that page click “Supplemental Directives.” Read them.

    For the HAMP Solutions escalation assistance, from the home page, go to “Resources” on the top blue menu bar, “For counselors.” Scroll down to: “Case Escalation Process,” where it says: “If you believe that a servicer is incorrectly interpreting HAMP guidelines, there is a process in place to help you. Find out the best way to escalate your case so that you get an answer to your concerns.” Click “Access Now”

    Skip Step One, which is “First, work through your normal contacts and channels with the servicer. If that does not resolve the issue, elevate your concern to a senior manager within the servicer’s organization.” Refer to the above. There is no senior manager who can or will help you.

    Go to Step Two, “Contact the Appropriate Escalation Team.” “An escalation specialist will work with the servicer regarding the case and seek to provide you with an initial status within four business days of receipt of the requested inquiry information and borrower authorization. If the servicer is unwilling to comply with program guidance or the escalation team identifies systemic non-compliance, the escalation team may report the servicer to the Making Home Affordable Compliance team.”

    The jury is still out on this, whether it is going to be just another servicer front, or if it will actually have some teeth. It is the only thing out there now.

  • It is true that you can modify a loan for an investment property – but you can’t do it under HAMP. Federal guidelines for loan modification state the house must be owner-occupied. However, just as you state in the last point, you can still get a modification, it just won’t be under the government’s program.