By Bob Massi, ,
Published May 07, 2015
Editor's note: This is the second of a four part series on "Shattered Dreams" by attorney and Fox News Legal Analyst Bob Massi. Watch Bob answer your questions about the foreclosure crisis Thursday mornings on "Fox & Friends."
Let’s assume you live in one of the geographical areas hardest hit by the home mortgage crisis. The economic boom that your lender assured you would continue to boost the value of your home has turned into an economic bust and the house you extended yourself to buy—because it would be such a great investment—is now your biggest risk for financial ruin.
You feel like you are trapped, throwing good money after bad every time you make a payment.
Maybe you can’t even make the payments. Circumstances have turned against you and you’ve lost your job, or maxed out your credit, or have been forced to take a job at reduced pay. Whatever the reason, you can’t afford your mortgage payments and you are desperate for a solution.
The banks and the federal government would like you to believe that a simple modification to your mortgage loan is all it will take to put you back on the path to financial stability. Here’s why you shouldn’t believe them:
1. To qualify for a loan modification, you need to jeopardize your credit rating. In order for a lender to see you as enough of a risk to offer loan modification, you need to be at least 90 days behind in default of your monthly payments. Being 90 days late can drop your FICO score by over 100 points. The lowered credit score can negatively impact your ability to refinance the loan or to rent in the future.
2. If you qualify after a financial review, you still have to make regular payments during the bank’s “trial period.” If this isn’t a scam, I don’t know what is.
Assuming, after submitting extensive financial documentation, your bank approves you for a loan modification trial period, they ask you to make three months of payments while the modification is prepared.
Once you’ve made the three months of (full) payments, you’ll receive a letter from the bank saying that since you have been able to make fully payments they will need to review your application for relief – and please make three more months of payments. At the end of six months of making full payments, the bank will say that based on your ability to pay over the past six months, you no longer qualify for a loan modification!
3. Loan modifications don’t solve the bigger problem. Even if you qualify for, and receive a loan modification, you are still paying on a house that is worth less than you owe on it. Loan modifications do not reduce the principle amount due on the mortgage. --They merely provide relief on the amount of interest due.
So, if you owe $200,000 in principle, that is still how much you must pay back--even if your house is now only worth $120,000. No wonder 70% of loan modifications fail!
If you are adamant that you must keep your home--no matter what--then a loan modification is your first option. Plan to endure a lot of frustration and shame while dealing with your lender who will make the process as long and drawn out as possible.
Plan to have days when you honestly resent living in the home that has forced you into this position.
And be sure your financial picture is improving over time, because whatever extra savings you hope to gain in the short term with a loan modification will be used up on the back end, when the difference gets tacked back on to the end of the loan.
If you’ve come to the conclusion that hanging on to your home is like hanging on to a bad relationship and you’re ready to get divorced, then it’s time to consider the permanent options for getting out of your house payments.
Bob Massi is an attorney and Fox News Legal Analyst. Watch him discuss the foreclosure crisis on "Fox & Friends" on Thursday, August 18.