Should we take the Refi at 4.875% or try for a Loan Modification?

[Anonymous]

Hello,

I have taken the pre-qualification test for the Making Home Affordable loan modification program. And, based on their very basic questions, it appears we would qualify.

The problem is our mortgage servicer is a small local bank and they don't appear to be willing to participate in the loan modification program.

We have applied for refinancing through them at a 4.875 rate for 30 years fixed. If approved our debt to income ratio will be at 47.5%, which is still high.

They have informed us if the refinancing doesn't go through, they'll probably be selling our loan. In other words, they won't be our servicer anymore.

My question, which I need answered ASAP, is: If we are accepted for refinancing, should we accept the deal or should we wait and see if the new servicer will be willing to give us a loan modification?

My next question, probably the most important question, is: Based on all the information I'm going to give you, do you think we'd be accepted for a loan modification?

Here are our particulars:

•     My husband and I own a single-family home with one mortgage.

•     The house is valued at $444,000.

•     The principal balance is $333,000.

•     The loan is a 7% ARM, which will adjust in 2011.

•     We are not in default.

•     We closed on this loan in June of 2008

•     My FICO score is 670.

•     My husband's is 650.

•     We had a Chapter 13 bankruptcy, which was discharged in April of 2005.

•     The bankruptcy has dropped from our credit report.

•     We have a couple judgements on our credit report.

•     My husband has a couple/three medical collections.
  

•     We DID have over $100,000 in credit card debt, thus the bankruptcy, but now have no   credit cards and no debts whatsoever except our mortgage. And, that's one reason why our scores are low...we're showing no credit history except the mortgage.

•     My yearly gross income is $58,000.00.

•     Monthly gross is $4833.

•     Our monthly payment is currently $2856.00.

•     Which makes our debt-to-income ratio 59%, which is a HUGE burden on us. So, we would love it if we could get it down to 31%!

•     My husband and I were self-employed for 8 years. (1997-Sept of 2005)

•     In April of 2005, we needed to pay off some investors and we had to refinance our house to do that.

•     Because of the bankruptcy, and because we were self-employed, we were forced into a stated, sub-prime loan with New Century Mortgage for 11%.

•     We had that loan until June of 2008, when we go into our current 7% loan.

•     We sold our business in late 2005.

•     Since then, my husband has dabbled on ebay and also rents a retail space where he sells his wares in person.

•     So, in other words, he has his own business. But in the past two years he has made no money at this endeavor and, in fact has lost money, which we've shown on our tax returns.

•     He was also employed for 1 year, from January of 2008 through February of 2009. That's how we were able to be approved for this current 7% loan.

•     He quit in February of this year. But, if he hadn't quit, he would have been fired.

•     So, the fact he makes no money, and the fact he is no longer employed at his "real" job has put a real burden on us.

I was reading the FAQS on the Making Home Affordable website and this particular paragraph is confusing to me:

"If you report a hardship, your servicer will: Apply a value test to determine if the cost of the modification (including the  government’s incentive payments) is less costly for the investor than not  modifying the loan (loans held by borrowers who have a lot of equity or  whose incomes are very low in relation to the value of their homes probably will not pass this value test)."

Questions concerning that statement:

• Would our particular loan be less or more costly than not modifying the loan?

• We DO have $111,000 of equity, which is 75% LTV. Is that considered "a lot of equity?"

• Is our income "low in relation to the value of our home?"

Would anything about what I've told you prevent us from being approved?

Also, will our loan servicer be able to sell our loan to a servicer that is participating? Does it work that way, or would our current servicer have no say whatsoever in who buys our loan?

I'm getting the feeling we're going to hear about the 4.875% refi this week, and we really need to know what to do. Please any advice would be most appreciated.

 Thank you, Peggy

[DallasLoanGuy]

Loan modification? For what?

You aren't upside down.

Loan mod is for people who cannot refi.

You should sell and downsize if you cannot afford the home. You are not a candidate for loan mod.

[Anonymous]

You don't have to be upside-down. If you read the requirements below from the Making Home Affordable FAQs, you'll read it has nothing to do with being upside-down.

To apply for a Home Affordable Modification, you must:

1. Be an owner-occupant in a one to four unit property,
2. Have an unpaid principal balance that is equal to or less than $729,750 for one unit properties (there is a higher limit for two to four unit properties - consult your servicer),
3. Have a loan that was originated on or before January 1, 2009,
4. Have a mortgage payment (including taxes, insurance, and home owners association dues) that is more than 31% of your gross (pre-tax) monthly income, and
5. Have a mortgage payment that is not affordable, perhaps because of a significant change in income or expenses.

[Anonymous]

Plus we can't refinance with the Government's plan because the government's plan requires that the loan be serviced by Fannie Mae or Freddie Mac, and ours is not. SO, in other words, ours is not currently a conforming loan.

[DallasLoanGuy]

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@Anonymous wrote:

You don't have to be upside-down. If you read the requirements below from the Making Home Affordable FAQs, you'll read it has nothing to do with being upside-down.

To apply for a Home Affordable Modification, you must:

1. Be an owner-occupant in a one to four unit property,
2. Have an unpaid principal balance that is equal to or less than $729,750 for one unit properties (there is a higher limit for two to four unit properties - consult your servicer),
3. Have a loan that was originated on or before January 1, 2009,
4. Have a mortgage payment (including taxes, insurance, and home owners association dues) that is more than 31% of your gross (pre-tax) monthly income, and
5. Have a mortgage payment that is not affordable, perhaps because of a significant change in income or expenses.

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Just because you can answer yes to 5 questions doesnt mean that the lender will do a loan mod.

You are in fantastic shape. If you cannot afford it at 4.875% what are you looking for?

Would a temporary lower rate get you thru the tough times?  maybe someone wouldwork with you on that. but they arent going to chop down your principle or give you a 2% fixed rate.

remember: the value principle from your cut & paste. it has to make sense.

i give you nearly 0% chance at a mod unless it is a temporary/very short deal based on something i am not seeing here.

YOU have options. you can sell and downsize. they will point that out to you!!

 

[Lel]

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@Anonymous wrote:
Plus we can't refinance with the Government's plan because the government's plan requires that the loan be serviced by Fannie Mae or Freddie Mac, and ours is not. SO, in other words, ours is not currently a conforming loan.

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You just said that you don't qualify for the Making Home Affordable plan.  So you can't point to the criteria listed on the Making Home Affordable plan's website to say that you automatically qualify for a loan modification.

Lenders who do not participate in the Making Home Affordable plan do not have to use the Making Home Affordable plan criteria to determine who gets a modification.  That's like expecting US traffic laws to apply British roads.  Lenders who do not participate in MHA will establish their own criteria for modification.

Like DallasLoanGuy said, you clearly have options available to you that are not available to many.  The biggest thing: you have equity, and a substantial amount of equity given the rough financial road that you have already endured.  You are one of the fortunate ones.

Another thing: I believe your is still considered to be a conforming loan.  If the original loan balance was below $417,000 (under the old rules; the conforming limit may be higher depending on your locale), then it IS conforming.  Just because the investor is not Fannie or Freddie doesn't make it non-conforming.

There is a low likelihood of getting a modification from your lender, but it never hurts to try.  You might get lucky.

[Anonymous]

Hi, thanks so much for trying to help. Yes, I know that acceptance in this program is not a given...that's why I gave as many details about our situation as possible. I'm just trying to find out what criteria the servicer will look at in regards to our situation in determining whether or not we'd be accepted for a loan modification. I mean, based on those meager questions, we'd qualify. But, I know they'll be looking at the particulars.

The whole idea behind the government's loan modification plan (as opposed to their refinance plan) is to help people who, for whatever reason, are in a hardship. And, since my husband lost his job, we're now in a hardship. The government also wants to help people get their payments down to 31% of their monthly gross. We're currently at 59% debt to income. Even if we get approved for a refinance at 4.875 we'll be at 48% debt to income.

But, I just need to know, given all that and given the fact we seem to pre-qualify, would we likely still be turned down?

I think the answer is in that cut and paste...which I don't understand. I wrote some questions below it. 

Could someone please answer all those questions I posted at the end of my original posting, including the ones about the cut and paste? I'd really appreciate it.

Thanks again!

[Anonymous]

Hi, Lel,

Regarding your statement: "You just said that you don't qualify for the Making Home Affordable plan..."

What I was referring to, in regards to not qualifying, was that we didn't qualify for the government's refinancing plan. Because to participate in the government's refinancing plan, the loan HAS to be currently serviced by Freddie Mac or Fannie Mae...and ours is not.

I shouldn't even have brought up conforming or non-conforming, as that has nothing to do with the criteria for acceptance in the loan modification program, (or even the refinance plan, I don't think.) ...and I shouldn't have confused matters by mentioning it.

Thanks again!

[Lel]

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@Anonymous wrote:

What I was referring to, in regards to not qualifying, was that we didn't qualify for the government's refinancing plan. Because to participate in the government's refinancing plan, the loan HAS to be currently serviced by Freddie Mac or Fannie Mae...and ours is not.

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Again, the key factor here is that your lender is not participating in the Home Affordable Modification program offered by the government. If your lender is not participating, then the lender is completely free to establish its own criteria for modification. The Making Home Affordable criteria for eligibility have no bearing on your situation. Even if your lender were participating, just meeting the criteria for a modification doesn't mean that you're going to get one. It's not a program that's forced on the lenders.

Long before Obama was president and the Making Home Affordable plan was created, lenders had been doing loan modifications using their own criteria. I know this from firsthand experience.

Interestingly, if your current bank does sell your loan to another servicer, that new servicer might be participating in the government plan. You never know.

[Anonymous]

Right. I understand the fact that not all lenders are participating. I mentioned in my original posting that our servicer is probably going to sell our loan if the refinance doesn't go through. So, if they sell our loan AND if the new servicer is participating, would we qualify based on our particulars? Please also, if you would, answer the questions after the cut and paste in my original posting. I think that's of extreme importance in helping to determine if we'd qualify, but I don't understand what they're saying. Thanks!