Q: My aunt lives in Georgia, and said she heard you talking on your radio show about the new law for home loan modifications. I currently have an FHA loan through one of the big box lenders and am now 3 months behind due to medical reasons.
I have talked with a representative from my lender and they are supposed to be doing a medical hardship loan modification for me once I get everything faxed over to them.
The lender is giving me a 3-month trial loan modification to see if I can make these next 3 payments on time and if so they will modify my loan. Our normal payments are $1088.83 and the 3 payments they have us set up on are $1130.39.
My question is do you think this is the route I should take or should I wait for the new law to take effect? I would greatly appreciate any help or advice you can give me. I am trying to avoid foreclosure and will soon be 3 payments behind.
Thank you for your help.
A: I’m confused as to how you can you afford to spend more on the modified loan than you did on your old payment schedule. It sounds to me that the lender has simply tacked onto your payments what you owed and reamortized your loan payments and you are not getting a lower monthly mortgage payment. That’s not much of a loan modification.
A better option would simply be for your lender to extend your loan to a 30 or even 40-year term to get your payments down. This might allow them to leave your payments where they are or they might even fall.
You might also press your lender to lower your interest rate all the way down to 2 percent, if it will get your payments back to around 31 percent of your gross monthly income (or even less than that) so they are affordable as you come out of this medically-induced financial crisis. The Obama Making Home Affordable Refinance Program encourages lenders to reduce the interest rate on loans, in some cases to 2 percent, or extend the term of the loan, or even in some cases reduce the amount owed on the loan. The Obama administration is pushing lenders hard to get as many loan modifications done as possible and as fast as possible under the Making Home Affordable Refinance Program. But not all lenders and not all loans are eligible under the Making HOme Affordable Refinance Program. The home must be your primary residence and the loan must be held by Fannie Mae or Freddie Mac. You can see if your loan is held by these institutions by searching for your loan at the loan look up site.
I’m concerned about you signing up for a loan modification that requires higher payments. Almost 70 percent of loans that were modified have gone bad, most because payments weren’t reduced at all, and in some cases were higher. I don’t know what the lenders are thinking, but if you can’t afford your payments before your loan is modified, how can you afford to make higher payments during the trial loan modification period?
You don’t mention where you are with your health issues or financial issues, but I hope they’re all behind you now. For general knowledge, all loan modifications start out with a trial period of three months. If you make the payments in full, on time and the checks don’t bounce, the loan modification under the Obama Making HOme Affordable Refinance Program will become permanent.
I don’t know what new law you’re referring to, but the big box lenders and other loan servicers are being pushed by the federal government to step up their actions to help more people modify their loans.
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Currently, the Obama administration is attempting to get lenders to modify borrowers’ loans under the Making Home Affordable loan program. Under the Making Home Affordable plan, lenders are encouraged to modify loan terms for troubled loans by reducing the interest rate on the loan or extending the loan term. In some cases loan interest rates can be reduced to two percent and loan terms can go out to forty years.
FHA announced a new program for loan modifications that would allow a modification to be based on 70 percent of the loan. The remaining 30 percent would be a silent second loan at zero percent interest. You would not have to pay off the second until you pay off your first mortgage or sell your home.
The FHA loan modification program was supposed to be active by August 15th. I haven’t heard much about it, which makes me think that the deadline has slipped. You can read about the program in the newsroom at HUD.gov.
From a personal finance advice and real estate advice point of view, I’d go back to your big box lender and ask them to do more to cut your payments. You may be eligible for an FHA streamline refinance, which would simply cut your interest rate. If you need help, call the Homeowners for HOPE hotline (888) 995-HOPE or speak to a HUD-certified housing counselor.