By Diana Hill, Online Trading Academy Real Estate Investor Instructor
Welcome to the new Real Estate section of Lessons From the Pros! I'm excited to jump right in with a hot topic in real estate investing.
I have been getting a lot of questions about what loan modifications are and how they work. A loan modification is considered a permanent change in one or more of the terms of a mortgagor's loan, allowing the loan to be reinstated (i.e. no longer delinquent), and results in a payment the mortgagor can afford. There are a lot of misconceptions about the new regulations, so I will take this article to address some of those.
One of the most common misconceptions is that a loan modification will reduce the mortgage principal. However, in President Obama's loan modification plan, it does not require the servicers to reduce the mortgage principal. The director of the Lusk Center for Real Estate at USC, Richard Green says, "For the underwater loans, if you don't write down the balance to be less than the value of the house, people will have an incentive to default." However, on the other end of things, Warren Buffett was quoted to say, "Commentary about the current housing crisis often ignores that crucial fact that most foreclosures do not occur because a house is worth less than its mortgage. Rather, foreclosures take place because borrowers can't pay the monthly payment that they agreed to pay."
Another very common misconception is that any mortgage is a candidate for modification. This plan was created to help the "responsible homeowner," not the "speculator" (or as we like to be called, investors). Only owner-occupied, primary residences with outstanding principal balances of up to $729,750 are eligible. Occupancy status is verified though documentation.
There are several criteria to qualify for the current plan. A list of the most common ones is below:
- As the homeowner, it must be your primary residence
- Must be owner occupied
- The homeowner must have a hardship – i.e. loss of income, increase in expenses, payment shock from an adjustable rate mortgage, divorce, or medical expenses
- The homeowner must qualify for the modified mortgage
If these qualifications are met, then the lender must decrease the monthly house payment to 31 percent of the homeowner's income. This modification plan will only help the homeowners for five years, not the entire term of the loan. At the end of five years, the interest rate on the home loan can be raised by the mortgage lender one percentage point per year until the interest rate is close to what it was the week prior to the home loan mortgage modification's approval.
Now that you're more enlightened as to the qualifications and restrictions on a loan modification, you might very well be asking yourself, "WHY is this important to me and the value of my home?" One study in Chicago found that a foreclosed home reduces the price of nearby homes by as much as 9 percent. The President recently said, "Think about it. What is the first thing you'll do if you want to sell your house, run comps." If those comps are based on very depressed values caused by foreclosures, where does that leave you? So by others getting loan modifications, it'll help keep the value of your home higher.
Or you may be saying to yourself, this might be an option for me or someone close to me, but how do you know where or how to start the process? Be very careful to avoid getting involved with scam artists. Do not fall for claims, such as a "97% success rate" for cutting your mortgage payment. No one can make any blanket guarantees. It is best to call your lender first. See www.ftc.gov for warnings.
My goal with these articles is to keep you informed of the real estate industry and the various aspects of the industry. If there are issues you have questions about, please submit them to me at dhill@tradingacademy.com, and it will be my honor to follow up on them for you.
Great Fortune,
- Diana Hill
|
