Imagine this ! You purchased your home and have been making your payments diligently every month for the last 4 years. The real estate market value in your area has dropped and you find yourself “upside down” in your loan. (You owe the bank more than what your home is worth). You also find out that the adjustable rate mortgage loan you obtained when you purchased your home has now kicked in and your mortgage payments will rise significantly. You’re afraid because you can’t afford the new monthly payments.
So what’s your next move? You can’t sell the home because no-one wants to purchase in your neighborhood additionally, you have no emergency funds to relocate. So you recently read an article about loan modifications where your lender will lower your monthly payments to an amount you can afford and you think you are saved. Unfortunately it’s not quite that simple.
There are legal ramifications to negotiating a loan modification with your lender. First and foremost most lenders will make you go through the process of proving to them that you can no longer make your payments because of financial hardships or other unexpected circumstances. If you obtained your loan through a “stated income” or “no doc” loan program more, then it’s likely your mortgage broker or lender slightly exaggerated your income to get you the best deal in the first place . Well now you’re going to have to provide your lender with hard proof that you can no longer make your payments which would include but is not limited to (Bank statements, pay stubs, tax returns, etc.) If it turns out that these documents don’t coincide with what you claimed on your loan application, this could possibly raise a red flag.
Secondly, your lender is most likely going to give you a trial loan modification for say 3 -5 months. This is where they agree to take a lower payment for a few months to see if you will keep your word and are able to make payments on the remainder of the loan. The problem with this is now your loan is being reported as delinquent (since you are not making your full payment on time). This now puts your home in a state of technical default. This means the lender can, at any time during the loan modification process, still elect to foreclose on your home even if you are making the trial payments they requested. Additionally, after this trial period ends the lender can still deny your request for a loan modification. Now not only are you upside down on your home but you are in default as well.
Another legal ramification is you give up many of your rights and protections by accepting the loan modification. Going into default will effect your credit and even your ability to sell your property. Your lender may require you to pay them any profit you make from the sale or repay the amounts that were deducted from your payments. They may also demand a restriction be placed on the loan modification that prevents you from selling the property for a number of years.
A loan modification can only help you if it is for an extended term (say 30 years) with a fixed payment. But be sure to read all of the fine print in the disclosures your lender requires you to sign. The legal ramification of your loan modification could cause you to end up just paying your lender to rent your own home for a few months before they take it away from you.
Daniel Doran is a 20+ year veteran in the real estate industry. He is a previous owner of a law firm, mortgage and title company. Daniel has also written several books on mortgage modification, short sales and real estate investing. He currently specializes in Commercial Finance and Real Estate Development and is a graduate of Manhattanville College and Brooklyn Law School.