OK, so here’s the deal. All of the following is based on my experience, but my experience seems to be fortified with the similar experiences of many others. There are always exceptions to the norm (remember that plane that landed in the Hudson River?). I’ll tell you that you really have to want to do the legwork, as we did, to get a modification done. I feel like we were a success story, but it was also a long march to get there.
I can tell you that post-Ch 7 discharge modifications exist, and they are a worthwhile goal in the right circumstances. Before we start, I’ll tell you that loan modifications are hard to predict and difficult to “tough out.” There are no hard and fast rules – only “guidelines,” and different banks, divisions, and underwriters have different viewpoints of those guidelines.
Let’s break it down into two different types – federal and “in-house.” I’ll tell you my viewpoints of both, for what they are worth. Your mileage may vary.
First, federal modifications. These are generally underwritten following a set of guidelines known as HAMP, or the “Home Affordable Program.” The very basic principles of a HAMP modification are to get people out from under “risky” loans such as variable interest rate loans and underwater loans and move them into what they call an affordable permanent loan. The HAMP program is federally underwritten, which essentially means that the bank’s own policies, personnel, etc are a secondary consideration. This can be enormously frustrating, as you will get bounced from person to person, paperwork will “expire” or go missing, and generally the process will move slowly with a few restarts just for good measure.
In short, the loan structure that is offered via a HAMP modification looks like this: If you qualify, you will (well, maybe – see details later) end up with a mortgage payment at 31% of your adjusted gross monthly income. That payment will be based on one thing and one thing only – your income. It does not consider how far upside down you are, how much you have outstanding on your loan, or anything else from what I can tell. Yes, they will tell you otherwise, but believe me they are withholding the details. Trust me on this.
I won’t go into detail on what the qualifications are because they are readily available on the Internet. In short, you must have a steady income and a real reason that a modification will be necessary to keep you in the home.
As I said, what the bank will do under HAMP is aim for a specific payment of 31% of adjusted gross monthly income. The bank will ask you to fill out the same stack of paperwork you have filled out twenty times already. After a couple of weeks of farting around, they will congratulate you on being accepted into the HAMP process and offer you a three month trial period of payments. You must make those three months of payments to continue in the program. After that – yes, AFTER that - they will try to tweak the loan terms any way they can to make that target payment happen as part of a permanent loan.
How they tweak the loan will make your head spin. First, they will extend the term to 40 years. Second, they will establish an interest rate around the 2.5% range – not a permanent rate, but enough to get you started. Third, if they can’t get you to the target payment with those tweaks, they will do an evil thing – they will back-load the loan with a balloon payment and base the monthly payment on a partial principle amount.
Here is how that evil part works. Let’s say you have a loan for $300,000 and a gross income of $44,500 a year. They will temporarily drop the interest rate to about 2.5% and raise the term to 40 years, for a payment of $989/mo plus taxes and insurance. Lets say your property taxes, HOA dues, and homeowner’s insurance add $300/mo to the payment for a total of $1289/mo. If the target payment based on your income is $1150 (that is about 31% of your adjusted gross monthly income) they will then create a balloon payment at the back of the loan. In this case, what they would do is create a balloon payment of about $42,000 due on the last day of the loan, then base your payment on a principle amount of $258,000. Using $258k as the loan amount, 40 years as the term, and a temporary 2.5% interest rate, your payment would be $1150 a month including taxes, HOA, and insurance. Bingo!
The fine details are the killer. First, you start over on the loan term – and that will likely be 40 years on the term, starting the day you accept. Second, the interest rate they base it on is temporary – 5 years at best. The rate will increase up to a capped rate of about 4.5% or so after the fifth year. Last, they don’t care how much you owe or what the house is worth – the balloon payment guarantees that you are tied to the house and cannot get out from under it unless you can satisfy the entire loan, balloon and all.
Oh, and the REALLY good part… your offer is predicated on your making three months of trial payments. They will not tell you the loan terms until AFTER you have paid. Kinda like going to a car dealership and being offered a payment that you can afford, but not being able to take the car – or even know what car you bought – until you have made three payments. What a deal.
If you are late or miss a payment, Game Over. At the end of three months, they MAY OR MAY NOT be able to tweak the loan enough to get to that payment target. If not – Game Over (and thanks for the three payments!)! AND…they might extend the “trial period” out as long as 12 months – and THEN tell you Game Over because they cannot make the numbers work! (insert evil laughter here)
Funny – they don’t tell you the details until you have made your trial payments. Also funny – about 80% of the HAMP loans offered have “failed” according to the feds. These two items may be related…
Now, in your Ch 7, you were discharged from any personal liability from the mortgage (assuming you did not reaffirm). In a HAMP loan, you get that responsibility back…that is, unless YOU insert the proper notification into the HAMP agreement and ensure that the final agreement – if or when it ever arrives – include the release of personal liability. You must must must initiate that part yourself, and the responsibility for ensuring your final offer is structured properly is yours as well.
The good news about HAMP is that if you qualify, you qualify – all you have to do is apply and then put up with the six months of mind-numbing BS and lost/expired paperwork until they actually get around to doing the loan.
Frankly, I see the HAMP loan mods as a last-ditch effort to save your house. While they do exist, and while they can buy you time to decide what to do after your Ch 7 discharge, there are a few tripwires to watch out for, and it is an exercise in frustration to deal with the process. You do have alternatives, though.
Now, lets look at the other type of modification – an in-house (bank) modification. These mods are offered by the original lending bank, are owned by the bank, on the bank’s terms. Sometimes, they are more lenient than a HAMP loan, but usually they follow a similar set of guidelines. You will get a lot better and more personal attention this way, since the bank has a vested interest in keeping you as a client.
The BIG difference, however, is that you can generally negotiate the terms. You don’t have to get stuck with onerous terms that you can’t live with. You can easily get the personal liability issue resolved – most banks state in their modifications that they will abide by the BK discharge, so you wont have to babysit the issue. This is where we finally landed, after 5 months of frustrating HAMP paperwork.
If you contact the bank, you will need to be specific about the type of mod that you want to attempt. You will get pressed into the HAMP line almost for sure, unless you insist on an in-house mod. Don’t get discouraged – keep trying. And, remember that (especially if you are underwater on your loan) the banks often have more incentive to make a HAMP loan then an in-house mod.
Summary - If you discharged (did not reaffirm) your mortgage under Ch 7, I believe that you have three avenues to pursue. First, and honestly, if you are underwater (you owe more than the house is worth) very far, I suggest that you live for free as long as you can and surrender the house via foreclosure or short sale. Second, I suggest that you apply for a HAMP modification during that process, because it will generally give you more time to do the first thing.
Third, if you want to stay in the house, and are not too far underwater (or have equity), I suggest that you attempt an in-house modification with the bank. This is not a pleasant or fast process, but it did work for us. As I said, the home we modified was a second home, but we made it our primary residence to make the loan modification happen. It also had equity.
If you try an in-house refi, you must be paid in full and up to date. If you try a HAMP loan, it seems to help you if you are actually behind on your payments. This is why I suggest that a HAMP loan mod can be used as a strategy for delaying the inevitable if you plan to leave your house – it gives you, in most cases, an additional couple-three months of rent-free living while everything processes.
Afterthought… after Ch 7 discharge, if you stop paying your mortgage, then try a HAMP, then refuse the HAMP by not paying the three month trial payments, then apply for a short sale, you stand the likelihood of extending your rent-free lifestyle for quite some time. Also, a short sale, if successful, can qualify you for $3000 of federal funds for relocation under the HAFA program. You might also be able to work some other rent-back or pay-me-to-leave cash for keys deal by trying a short sale. Short sales are no fun at all, but it is an option.
Additional info – you can forget about getting the bank to modify your mortgage by reducing the principle. Principle reduction is a myth. It does not happen…not now, anyway. It is like seeing Bigfoot – everyone knows someone who knows someone who heard of someone who can prove that it happened to them…but I have never seen proof that it has happened. I could be wrong, and I sincerely hope you are the first people to have their loan amount slashed in half by the bank, but I would not bet the house on it (no pun intended).
I can tell you that post-Ch 7 discharge modifications exist, and they are a worthwhile goal in the right circumstances. Before we start, I’ll tell you that loan modifications are hard to predict and difficult to “tough out.” There are no hard and fast rules – only “guidelines,” and different banks, divisions, and underwriters have different viewpoints of those guidelines.
Let’s break it down into two different types – federal and “in-house.” I’ll tell you my viewpoints of both, for what they are worth. Your mileage may vary.
First, federal modifications. These are generally underwritten following a set of guidelines known as HAMP, or the “Home Affordable Program.” The very basic principles of a HAMP modification are to get people out from under “risky” loans such as variable interest rate loans and underwater loans and move them into what they call an affordable permanent loan. The HAMP program is federally underwritten, which essentially means that the bank’s own policies, personnel, etc are a secondary consideration. This can be enormously frustrating, as you will get bounced from person to person, paperwork will “expire” or go missing, and generally the process will move slowly with a few restarts just for good measure.
In short, the loan structure that is offered via a HAMP modification looks like this: If you qualify, you will (well, maybe – see details later) end up with a mortgage payment at 31% of your adjusted gross monthly income. That payment will be based on one thing and one thing only – your income. It does not consider how far upside down you are, how much you have outstanding on your loan, or anything else from what I can tell. Yes, they will tell you otherwise, but believe me they are withholding the details. Trust me on this.
I won’t go into detail on what the qualifications are because they are readily available on the Internet. In short, you must have a steady income and a real reason that a modification will be necessary to keep you in the home.
As I said, what the bank will do under HAMP is aim for a specific payment of 31% of adjusted gross monthly income. The bank will ask you to fill out the same stack of paperwork you have filled out twenty times already. After a couple of weeks of farting around, they will congratulate you on being accepted into the HAMP process and offer you a three month trial period of payments. You must make those three months of payments to continue in the program. After that – yes, AFTER that - they will try to tweak the loan terms any way they can to make that target payment happen as part of a permanent loan.
How they tweak the loan will make your head spin. First, they will extend the term to 40 years. Second, they will establish an interest rate around the 2.5% range – not a permanent rate, but enough to get you started. Third, if they can’t get you to the target payment with those tweaks, they will do an evil thing – they will back-load the loan with a balloon payment and base the monthly payment on a partial principle amount.
Here is how that evil part works. Let’s say you have a loan for $300,000 and a gross income of $44,500 a year. They will temporarily drop the interest rate to about 2.5% and raise the term to 40 years, for a payment of $989/mo plus taxes and insurance. Lets say your property taxes, HOA dues, and homeowner’s insurance add $300/mo to the payment for a total of $1289/mo. If the target payment based on your income is $1150 (that is about 31% of your adjusted gross monthly income) they will then create a balloon payment at the back of the loan. In this case, what they would do is create a balloon payment of about $42,000 due on the last day of the loan, then base your payment on a principle amount of $258,000. Using $258k as the loan amount, 40 years as the term, and a temporary 2.5% interest rate, your payment would be $1150 a month including taxes, HOA, and insurance. Bingo!
The fine details are the killer. First, you start over on the loan term – and that will likely be 40 years on the term, starting the day you accept. Second, the interest rate they base it on is temporary – 5 years at best. The rate will increase up to a capped rate of about 4.5% or so after the fifth year. Last, they don’t care how much you owe or what the house is worth – the balloon payment guarantees that you are tied to the house and cannot get out from under it unless you can satisfy the entire loan, balloon and all.
Oh, and the REALLY good part… your offer is predicated on your making three months of trial payments. They will not tell you the loan terms until AFTER you have paid. Kinda like going to a car dealership and being offered a payment that you can afford, but not being able to take the car – or even know what car you bought – until you have made three payments. What a deal.
If you are late or miss a payment, Game Over. At the end of three months, they MAY OR MAY NOT be able to tweak the loan enough to get to that payment target. If not – Game Over (and thanks for the three payments!)! AND…they might extend the “trial period” out as long as 12 months – and THEN tell you Game Over because they cannot make the numbers work! (insert evil laughter here)
Funny – they don’t tell you the details until you have made your trial payments. Also funny – about 80% of the HAMP loans offered have “failed” according to the feds. These two items may be related…
Now, in your Ch 7, you were discharged from any personal liability from the mortgage (assuming you did not reaffirm). In a HAMP loan, you get that responsibility back…that is, unless YOU insert the proper notification into the HAMP agreement and ensure that the final agreement – if or when it ever arrives – include the release of personal liability. You must must must initiate that part yourself, and the responsibility for ensuring your final offer is structured properly is yours as well.
The good news about HAMP is that if you qualify, you qualify – all you have to do is apply and then put up with the six months of mind-numbing BS and lost/expired paperwork until they actually get around to doing the loan.
Frankly, I see the HAMP loan mods as a last-ditch effort to save your house. While they do exist, and while they can buy you time to decide what to do after your Ch 7 discharge, there are a few tripwires to watch out for, and it is an exercise in frustration to deal with the process. You do have alternatives, though.
Now, lets look at the other type of modification – an in-house (bank) modification. These mods are offered by the original lending bank, are owned by the bank, on the bank’s terms. Sometimes, they are more lenient than a HAMP loan, but usually they follow a similar set of guidelines. You will get a lot better and more personal attention this way, since the bank has a vested interest in keeping you as a client.
The BIG difference, however, is that you can generally negotiate the terms. You don’t have to get stuck with onerous terms that you can’t live with. You can easily get the personal liability issue resolved – most banks state in their modifications that they will abide by the BK discharge, so you wont have to babysit the issue. This is where we finally landed, after 5 months of frustrating HAMP paperwork.
If you contact the bank, you will need to be specific about the type of mod that you want to attempt. You will get pressed into the HAMP line almost for sure, unless you insist on an in-house mod. Don’t get discouraged – keep trying. And, remember that (especially if you are underwater on your loan) the banks often have more incentive to make a HAMP loan then an in-house mod.
Summary - If you discharged (did not reaffirm) your mortgage under Ch 7, I believe that you have three avenues to pursue. First, and honestly, if you are underwater (you owe more than the house is worth) very far, I suggest that you live for free as long as you can and surrender the house via foreclosure or short sale. Second, I suggest that you apply for a HAMP modification during that process, because it will generally give you more time to do the first thing.
Third, if you want to stay in the house, and are not too far underwater (or have equity), I suggest that you attempt an in-house modification with the bank. This is not a pleasant or fast process, but it did work for us. As I said, the home we modified was a second home, but we made it our primary residence to make the loan modification happen. It also had equity.
If you try an in-house refi, you must be paid in full and up to date. If you try a HAMP loan, it seems to help you if you are actually behind on your payments. This is why I suggest that a HAMP loan mod can be used as a strategy for delaying the inevitable if you plan to leave your house – it gives you, in most cases, an additional couple-three months of rent-free living while everything processes.
Afterthought… after Ch 7 discharge, if you stop paying your mortgage, then try a HAMP, then refuse the HAMP by not paying the three month trial payments, then apply for a short sale, you stand the likelihood of extending your rent-free lifestyle for quite some time. Also, a short sale, if successful, can qualify you for $3000 of federal funds for relocation under the HAFA program. You might also be able to work some other rent-back or pay-me-to-leave cash for keys deal by trying a short sale. Short sales are no fun at all, but it is an option.
Additional info – you can forget about getting the bank to modify your mortgage by reducing the principle. Principle reduction is a myth. It does not happen…not now, anyway. It is like seeing Bigfoot – everyone knows someone who knows someone who heard of someone who can prove that it happened to them…but I have never seen proof that it has happened. I could be wrong, and I sincerely hope you are the first people to have their loan amount slashed in half by the bank, but I would not bet the house on it (no pun intended).
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