Would You Take a Loan Modification?
Ever since the Making Home Affordable Program was rolled out I’ve been very intrigued with the plan. Do we need a loan modification? No. Would it be nice? Sure.
In a weird twist of events, it looks like we qualify (on paper) for the loan modification program.
Home Affordable Modifications
To find out of you are eligible for the Home Affordable Modification you need to answer these questions from MakingHomesAffordable.gov:
- Is your home your primary residence?
- Is the amount you owe on your first mortgage equal to or less than $729,750?
- Are you having trouble paying your mortgage?
For example, have you had a significant increase in your mortgage payment OR reduction in your income since you got your current loan OR have you suffered a hardship that has increased your expenses (like medical bills)?
- Did you get your current mortgage before January 1, 2009?
- Is your payment on your first mortgage (including principal, interest, taxes, insurance and homeowner’s association dues, if applicable) more than 31% of your current gross income?
Ironically, I can answer yes to these questions since I left my job. Number 3 has some gray area, since technically, we did have a significant reduction in income, but it was voluntary on my part.
However, because my job was actually eliminated a couple months after I left, I did confirm with the housing counselors that it would qualify. Their definition of “trouble paying your mortgage” is based solely on income from a job (or self-employment) and doesn’t include all of our alternative income sources.
Do We Need It?
No. When I left my job, I set aside money in CD Ladders to cover our yearly expenses.
The bank’s requirement of “31% of your current gross income” doesn’t include passive income, living off of retirement income (unless you are actually of retirement age), or the use of CD ladders. Ultimately, it would never occur to a bank that all of a household’s income doesn’t come from a JOB in their underwriting.
So while it looks like to the outside world that we can’t afford our mortgage; we’re perfectly fine. I realize we’re in a very unique situation, though.
How Much Would We Save?
Just for fun, I calculated the after tax savings if we were to use the loan modification program. It would save us over $60,000 over the first five years. And because the rate only adjusts 1% each year after that, there would be more savings in years 6-8.
That’s not small change!
Ethics of a Loan Modification
I have lots of questions about the ethics of using this program. Where does this program fall?
For example, many people will get to take advantage of the $8,000 First Time Home Buyer Tax Credit, who were planning to buy a house anyways. Is this along the same lines?
If we were to use the modification, does it take away the ability for others to use it who really cannot afford their mortgage due to losing their job?
I’m a taxpayer who reports all my income, so I’ll be helping fund this very program with my tax dollars. Does that make a difference?
My lender isn’t participating anyways, so it’s not possible for us to take advantage of the program, whether it’s right or wrong.
But I thought it would be a great topic of discussion. I’m sure many of you have very strong opinions on the topic!
Would you take a loan modification if you qualified?
Thankfully we don’t have any hardships, and can afford our payments. However, what irks me a little is the 31% of GROSS income…. Reason being, my mortgage payment is way below the 31% threshold. However, if it were on NET income (which is basically the money I really have left to spend), I’m above the 31%
My mortgage payment is currently 32.43% of income. I think I would save an additional $59 a month for 12 months times 5 years… $3,534 before taxes?
Did I do that right? I’m confused, does the modification just cut the interest portion of the payment, so then each payment would pay the same amount of principal and the before modification payments?
Hmmm, maybe I need to get a nice low income job and quit mine to maximize the benefit of a loan modification. 🙂
@ Brian: The loan would actually be modified to give you a new principal and interest breakdown. You could try a mortgage calculator to figure it out. Put in your current balance, the term you have left, and keep lowering the interest until the payment meets the 31% of income criteria.
Your total savings will be the amount of the lower payments each month plus the new lower principal balance after 5 years.
Don’t forget to include the $1000 principal reduction you’d get each year for 5 years too.
You qualify for the program, are funding the program, and your (if it were possible) entrance into the program would not prevent someone who qualified from using the program. Based on that, to not apply would be foolish. Because the authors of the program chose only to include active income, you should not feel obliged to take a “morally higher” road where you include your passive income, because the authors did not feel it important enough to include.
Does taking advantage of the program affect my credit in some way?
If you qualify for something like this, I think that you owe it to yourself and family to take advantage of it. You probably don’t qualify for much when it comes to this huge pork package, but you will probably qualify to pay it back, so why shouldn’t you try to take advantage of something that comes out of it? It would actually be nice to see someone that has lived within their means benefit rather than people that have lived above their means.
The program is set up to help people in trouble so if I were in your shoes, I would feel pretty uncomfortable taking advantage of it. Technically, you would be justified in going for it, as I’m sure some people in the gray areas are. I have told my husband many times that this program and other bailout programs are just rewarding failure, greed, and incompetence but I have come to see that it is a necessary evil if we are to get out of this mess.
Think about how much your investments have been devalued. You have probably already lost more than you would benefit from taking advantage of a program that is rewarding “failure, greed and incompetence” and through further incompetence during its implementation has allowed someone to benefit that isn’t in trouble. How do you know if you won’t be in trouble down the road? It is like not taking a tax deduction because you don’t really need the money or not using the first time home buyers tax credit because you were going to buy anyway. Senator Dodd and Senator Obama both got lower interest rates on their home loans than the general public (that would be us) did at the time they took out their loans. I think if you qualify, take it.
how could you not take advantage of this?? i agree with joe, sure you’re fine now and it looks like you’ll be ok in the future but who knows?
i will say though, that this is the part of the plan that irked me. the first thing i thought of was this scenario….a dual income couple with a couple kids, maybe in daycare, can just say, hey why use daycare. the wife can now quit her job and be a stay at home all the while living in a much nicer house than they could have been able to buy on only the husband’s salary.
i guess i am jealous and/or stupid for not thinking the govt might do something like this and instead prepared to downsize to one income. instead my wife is quitting to stay at home with our newborn while we rent and save up for a house to move out of our 1000 sq ft small rental with rotting hardwood floors and toxic oil smelling hvac system.
I contacted ING regarding the loan modification program. The first thing the woman said was they don’t have to do it because they aren’t attached to Freddie/Fanny. I told her that had NOTHING to do with it. She got snarly then and said that ING is offering its OWN program. So I requested information on it. She let me to believe that no other lender would take me if I was in default (which I’m not).
I spoke with the Hope folks and have an appointment to go over financials in early April. They aren’t having trouble placing the mortgages (EVEN IN DEFAULT), according to the woman I spoke with.
Interesting how a government program becomes a Marketing Plan for banks that don’t want to participate. I will compare the two and see which one makes the most sense. I’m disappointed in ING for intending to deceive me. They might lose a couple of customers.
I also talked to people at HOPE they just gave me a local number for what just for them to say no we cant help. If you have good credit I recommend you refinance, banks were bailed out they made thier money they wont help any one. I am planing on selling and rent an apartment and not wory about mortgage and taxes.
I think if there is an opportunity to save money you should do it.
This program was created to help prop up house prices and prevent foreclosures. No program is perfect and even if you weren’t really in the “intended” group of recipients – that doesn’t mean you shouldn’t get it.
Besides – if you can benefit financially from this, that will mean you are (technically) less likely to lose your home because of foreclosure which is what the thing is designed to do! 🙂
this sounds like a program that truly is intended for responsible people who are trying to remain responsible and not tip over due to compounding issues…when considering decreases in income it is not clear whether decrease in receipt (successful collection) of court ordered child support is within the description of “hardship”?
My wife and I put 20% down on a loan backed by Fannie….. the house we purchased is 60 miles from where we were living before…. so we quit our jobs (oct 2008)…. planned to use tax return money and additional savings to make the house payments until we got jobs….I got a job on 1/2009……. making 1800 a month…. the mortgage is 1800 a month…. my wife has not been able to find work….. AT ALL……. savings have basically run out…. i have been selling personal property to keep afloat…. I have not been able to find a 2nd job….. we are current on our mortgage…… do you guys think I WILL QUALIFY FOR A MOD?
I realize this is an old post, but Wow. I personally see a few issues with this.
First, your mortgage is $1800/month! If you currently make what you did then, and if your wife made at least the same amount, you still entered into a mortgage that was 50% of your total combined income! No lender should have approved that in the first place.
Second, you both quit your jobs during a time when the economy was starting to tank (starting in 2007). It was all over the news, so it’s not like it just creped up on you, yet you BOTH decided to risk it all for the sake of driving a few extra miles, which I assume you would gladly welcome right now if you could take your old jobs back.
Third, you planned on using tax return money and savings to fund a plan must have known was a risky one.
I admit, 60 miles each way is a LONG way, but I’d do it in a minute if it meant keeping a roof over my head and food in my families bellies. And, the next time you want to throw away your savings, call me and I’ll vive you my bank account number. You’re selling personal property to “stay afloat”? Your house is killing you! Get rid of it! Sell it, walk away from it, declare bankruptcy, something.
Short answer, you bought too much house and made some bad judgments. Personally, I don’t think a modification or refinance is for you. I think you should let it go and start over. Next time, use your head.
p.s. I realize your post sounds dangerously satirical, and if it is perhaps someone who is really in this situation will draw some insight from the comments.
Be well, do good work, and JUST SAY NO TO DEBT! 🙂
can some one explain to me how can the goverment say that your mortgage payment should be 31% of your gross income. I dont know about you but I pay bills and buy groceries with my net income not with gross income if the goverment would not take that money I would not be asking any one for help. What the goverment should do is stop spending on that stupid war and start worring about its own pepole, the goverment should bail out consumers not rich companies and banks.
This is a difficult question to answer. For some if it’s the same as rent they will want a loan mod, however some of the loan modifications I’ve seen the payment actually goes up! What help is that? The individual circumstances will determine if a loan modification is the best thing for someone.