Q: I am in loan modification hell. I signed up with a law firm that got on the home modification bandwagon pretty early on.
When I signed up with them, it was August, 2009 and I was living in New Jersey, and since then they have submitted my paystubs to my lender and my financials once. It has been several months and I still have not heard from either my lender or my lawyer. They keep updating me minimal information telling me that my loan is in review and that no documents are needed at this time.
Finally today, I received a letter from my lender requesting tax returns and paystubs and bank statements. The problem is that, when I originally filed for the loan modification, I was single and the interest rate on my loan went up to 9.5 percent.
I got married in August, 2009 and filed jointly for the first time last year for the tax year 2009.
My second problem is that I now rent a home with my husband in California. My concern is that my joint return now shows our income as being much higher than when I originally applied for the loan modification.
Does this mean I wouldn’t qualify for a loan modification? My husband is not on the mortgage at all. Will my living out of state affect the loan modification process as well?
A: I see several potential problems.
First, you no longer live in your property as a primary residence. You don’t even live in the same state. That makes it very unlikely that you’ll qualify for a loan modification. The loan modification programs are set up to help homeowners who are living in their homes as their primary residence.
In general, very few people have been helped by the government loan modification programs and your non-owner occupied status will exclude you from most, if not all, loan modification plans.
Second, your status (relationship and financial) has changed dramatically. And, that also makes it less likely that you’d qualify for a loan modification. While you might have qualified almost two years ago for a loan modification program, if your income now shows enough money to pay your loan as it stands, the lender will be unwilling to reduce your interest rate to help you out.
You need to think about other options. Can you do a short sale on the house? Can you let the bank foreclose? Can you rent your property for awhile until the neighborhood stabilizes? Even if you get in less money than you owe each month, maybe it’s a way to staunch the bleeding and give yourselves time to recover.
If the home is in a good neighborhood with great schools, you might be able to sell it a year or two down the line for a price that is greater than what it is today. If you see that the prices of homes will probably not increase in the next couple of years, you might be better off taking your losses now and rebuilding your credit over the next several years.
If you have assets, and you do a short sale, the lender may require that you liquidate some of those assets to pay off what you owe. Since the property is no longer your primary residence, there are tax implications: The IRS may look at the difference between what is owed and what the lender forgives as phantom income, on which you will be taxed at your marginal tax rate.
I don’t know what these lawyers are doing for you – sounds like nothing. Don’t pay them another cent, and if they have done nothing for you and you paid them a substantial fee upfront, you may want to request a refund of those fees. Some states have made it illegal to charge an upfront fee for loan modification services.
You can see if your former state has passed a law like that and investigate what work your attorneys actually performed. If they didn’t do much and they don’t want to refund you money that you paid them, you should contact the New Jersey office that licenses and disciplines attorneys and file a complaint.