Home > Mortgages > Underwater On Your Home Option 3: Get a Loan Modification

Comments 0 Comments

In this series, I detail six possible ways to deal with an “underwater” home—one that’s worth less than the amount of money owed on it. Here is part three of my six-part series.

When Javier Gonzales first started falling behind, he doggedly pursued a loan modification. He had both a first and second mortgage with the same lender, both at high interest rates. After seven months of sheer frustration—unreturned phone calls, paperwork that was sent to him on legal paper and therefore couldn’t be faxed back as required, and lost documentation—he finally got an offer that the lender told him would expire at five p.m. the same day he learned about it. It only covered one of the loans, and only fixed the rate for three years. Still, he signed the paperwork and overnighted a $500 processing fee to the lender.

Option #3: Home Loan Modification

When homeowners realize they are in over their heads on their home loans, many ask their lenders to modify their loans. With most loan modifications, lenders lower the interest rate and payment, either temporarily or permanently. It is also fairly common for lenders to extend the term of the loan or to allow borrowers to make up missed payments by tacking them onto the end of the loan or spreading them out over the remaining loan. Fewer than 3% of loan modifications overall involve principal reductions, though, according to data published by the Office of the Comptroller of the Currency. A recent New York Times article said that Bank of America and Chase are quietly modifying some their most risky loans—“option ARMs” that allow borrowers to pick payments so low that they can go deeper into debt even if they make their monthly payments on time—before borrowers default, and in some cases slashing the balance. But that seems to be the exception, not the rule.

The most well-known modification program is the government-initiated Home Affordable Modification Program. The Treasury Department reports that homeowners who were successful in getting permanent modifications on their loans through this program saw a median reduction in their monthly payment of 40 percent—more than $520 each month—amounting to a program‐wide savings for homeowners of an estimated $4.5 billion.

If you don’t qualify for HAMP, your lender may offer you its own modification program. There are also state and local programs that may help. Looking at modifications overall (not just HAMP-modified loans), payments dropped an average of $333.

Be prepared to fill out a lot of paperwork, and provide it more than once if necessary. Start a file, and keep detailed records from the start. Getting a mortgage modified can be a truly daunting process, and there have been numerous reports of homeowners being foreclosed upon while waiting for a loan modification to be finalized.

Caution: Be extremely careful before you pay someone—even an attorney—to help you modify your loan. The FTC’s Mortgage Assistance Relief Services (MARS) Rule prohibits companies that offer to help homeowners modify their loans from charging upfront fees. Seek help first from a HUD-approved housing counselor—call one at (888) 995-HOPE (4673).

Keeping a modified loan may be just as difficult as getting one in the first place. As default servicing industry website DSNews.com reports, “Fall-out within the program remains high…” Over half of trial modifications started since the program began were canceled because borrowers couldn’t keep up with payments, or were later found to be ineligible for the program. “An additional 58,020 permanent HAMP mods have been canceled” for unspecified reasons, according to the analysis.

Servicers may be partly to blame. The Connecticut Fair Housing Center, in partnership with seventeen legal service organizations and consumer law offices around the country, looked at 655 permanent loan modifications obtained by the attorneys’ clients and found that 154, or 24%, had significant post-agreement problems caused by the mortgage servicers. Problems included hundreds or thousands of dollars in improper fees, erroneous credit reporting, and even wrongful foreclosures.

And there is still that pesky issue of equity. The median HAMP modified loan totaled 118% of the home’s value, which means homeowners may be breathing easier payment-wise, but still at risk of defaulting if they run into any kind of financial problems again. Daren Blomquist, director of marketing communications for RealtyTrac warns that there is a serious risk of defaulting on a modified loan “unless the modification includes some kind of principal reduction.”

Finally, your credit may be affected, though that depends on how the lender reports the modification. During trial phase of HAMP, for example, your credit report may list “partial payment,” which is very negative, but during permanent modification that remark should be removed. Non-HAMP modifications may or may not be reported negatively, but it’s common for lenders to report delinquencies or partial payments on modified loans. Both are negative.

Other options for homeowners with “underwater” mortgages:

  1. Underwater On Your Home Option 1: Stay and Pay
  2. Underwater On Your Home Option 2: Refinance
  3. Underwater On Your Home Option 3: Get a Loan Modification
  4. Underwater On Your Home Option 4: Short Sale
  5. Underwater On Your Home Option 5: Walk Away / Foreclosure
  6. Underwater On Your Home Option 6: Bankruptcy

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team