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Mortgage Modification: Not Right for Everyone

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By Pamela Yip

(MCT)—For homeowners struggling to stay in their homes, a mortgage modification may be the way to go.

But before you choose that route, make sure the modification fits your needs and your wallet.

“Evaluating a mod (modification) offer is pretty straightforward,” says Keith Gumbinger, vice president at HSH.com, which publishes mortgage information. “Keeping in mind that a homeowner under duress may have little choice but to accept what is offered, there may not be a whole lot to evaluate.”

Under a loan modification, the lender changes the terms of your existing loan so that you can — hopefully — afford your mortgage payment.

Faith Schwartz, spokeswoman for Hope Now, an alliance of mortgage servicers, investors, mortgage insurers and housing counselors that helps struggling homeowners stay in their homes, said loan modifications are accomplished by either:

• Lowering your interest rate.
• Extending the term of your mortgage.
• Reducing the principal.
• Temporarily suspending — or forbearing — your regular monthly mortgage payment.

If you’re unemployed, it’s difficult to qualify for a mortgage modification and your best bet may be to seek forbearance, Schwartz said. But you could still qualify for a loan modification if your spouse is employed.

“You need some cash flow,” she says.

Depending on your situation, you may be eligible for help from the federal government’s Home Affordable Unemployment Program. Under this program, your mortgage payments may be reduced to 31 percent of your income or suspended altogether for 12 months or more.

Recent announcements regarding mortgage modifications highlight their importance as an option for struggling homeowners.

Bank of America said this month it has begun mailing letters to customers who may qualify to have their home loans reduced as part of a multistate settlement over alleged foreclosure abuses.

The bank estimates that more than 200,000 of its customers could potentially be in line for a reduction in the principal balance on their mortgage.

Bank of America estimates average monthly savings of 30 percent on mortgage payments of customers who qualify for this program.

Among the criteria to qualify: Borrowers must owe more on their mortgage than the property is worth and be at least 60 days behind on payments as of Jan. 31.

Also, the Consumer Financial Protection Bureau and the Treasury Department announced changes in the government’s Home Affordable Modification Program, or HAMP.

Starting June 1, military homeowners and other families who are displaced by a job-related move may still qualify as owner-occupants, which means they may still qualify for a HAMP mortgage modification.

A borrower may qualify if he or she:
• Is displaced because of an out-of-area job transfer and was occupying the home as a principal residence immediately before the displacement.
• Intends to return to the home at some point in the future.
• Doesn’t own any other single-family real estate.

If you’re considering a loan modification, there are questions you need to answer, starting with: What’s your goal?

“Is the goal to cover the short term, sell the home and move on, or to tide over a bad fiscal patch (such as a job loss), or has the problem become more intractable?” Gumbinger says.

Here are more questions to answer:

Can you afford it? This is the most important question.

Your modified payments need to be low enough “to be sustainable to get you over the hump until you can get back on your feet,” said Craig Jarrell, president of the Dallas region at Iberiabank Mortgage Co.

“You should not be paying more than 31 percent of your monthly income on a mortgage,” says Todd Mark, vice president of education at Consumer Credit Counseling Service of Greater Dallas. “If the answer is ‘I’m still short,’ then that’s a modification somebody shouldn’t get into.”

In fact, the federal programs aimed at keeping consumers in their homes have a goal of setting mortgage payments at 31 percent of a homeowner’s gross income, said Geoff Walsh, staff attorney at the National Consumer Law Center.

“Payments for principal, interest, taxes and insurance have to be set at that level, and that’s generally considered to be an affordable income-to-payment ratio for homeowners,” he said.

How long? This is really a two-parter. First, you need to know how long the lower payment will remain in effect.

“Many so-called permanent modifications offer lower payments that begin to step up after five years,” says Greg McBride, senior financial analyst at Bankrate.com. “What assurance do you have that you’ll be able to afford a higher payment five years from now?”

Secondly, you need to be clear on how long you plan to stay in the house.

“There’s no sense in trying to get a loan modification if they’re not committed to staying in it,’ Mark says.

Effect on credit? “Modifications in general have a relatively small impact to even a slightly positive impact,” says Sarah Davies, senior vice president of analytics, project management and research at VantageScore, the credit score developed by the three national credit bureaus.

“If you think about a principal reduction where you actually owe less money and therefore you have less exposure, it’s a little bit of a positive result,” she says.

Davies says homeowners with a modified mortgage will take a hit to their credit score of “zero to 20-30 points, depending on where you are on the starting score.”

That isn’t as severe as a short sale, which could lop off 110-120 points, or foreclosure, which could slash 115 to 140 points off your credit score, she said.

Bottom line, if you’re struggling to stay in your home, a mortgage modification may be just the ticket. But do your research before you sign anything.

Pamela Yip is a personal finance columnist for the Dallas Morning News.

©2012 The Dallas Morning News
Distributed by MCT Information Services

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