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Would You Take a Loan Modification?

Ever since the Making Home Affordable Program [1] 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 [2]:

  1. Is your home your primary residence?
  2. Is the amount you owe on your first mortgage equal to or less than $729,750?
  3. 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)?
  4. Did you get your current mortgage before January 1, 2009?
  5. Is your payment on your first mortgage (including principal, interest [3], 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 [4] 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 [5], 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 [6], so I’ll be helping fund this very program with my tax dollars. Does that make a difference?

Your Thoughts

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?