Step-By-Step Guide to Rental Property Loan Modification - Loans That Can Be Modified
Loan modification goes by a lot of different names. Whether you call it a loan modification, mortgage modification, restructuring, or a workout plan, loan modification is when a borrower, who is having difficulty making their mortgage payments, works with their lenders to change the terms of their mortgage loan. The workout plan could result in temporary or permanent changes to the mortgage rate, the term, or the monthly payment of the loan.
If you are an investor who foresees your interest rate increasing, or who is behind on your mortgage payments, you are not alone. While you may be temped to, the worst thing you can do is to hide from the banks. Banks will likely work with you if explain your situation to them. They might modify your loan, defer your payments, or offer other forms of assistance so you can make good on your commitment without losing the investment.
This article will help real estate investors gain an understanding of the step-by-step loan modification process, and teach them how to reach a successful result.
What Type of Loan Should Be Modified?
If your loan's interest rate is adjusting, every month, every 6 months, or every year or if your interest rate is above 5%, you should consider negotiating with your bank to modify the loan. It's not uncommon to see banks lower the interest rate to the 2% to 3% range for as short as three years, or as long as the remainder of the loan.
Some types of loans that have low introductory interest rates, but that have hidden costs may also need to be modified. These mortgages may have been easy for you to obtain and afford initially, but will not be affordable later on.
One example is a balloon loan, whose full principle is due 3-5 years from the loan initiation rather than the 30 years term of convention loan. No one can pay the full principle unless you try to sell the property before the due date. If your loan is upside down, the only option is to short sell or to foreclose. The former requires bank to approve; the latter will hurt your credit score. You will want to start negotiating with the bank early on, at least 1 year prior to the due date to allow sufficient time to solve the issue to your own interest.
Some other loans may have conventional 30 years term; however they are embedded with a provision called a prepayment penalty, which you may not even know about it. A fair-minded loan agent should never sell you a loan with a pre-payment penalty unless they disclose it in advance. You will usually pay a steep fee if you want to refinance or sell your property unless you fulfill the entire 30 years term. If these terms are present, they should be completely removed during loan modification.
Investors vs. Homeowners
This article is focusing on providing information for real estate investors. We will not cover homeowner-specific topics such as Making Home Affordable, the federal program announced in early 2009. A lot of our focus will be on the differences the investors will face when negotiating with the banks whose loan modification largely concentrates on federal programs and helps homeowners rather than investors.
It's unfortunate that there is a lot of more help from the federal and state governments for homeowners but very little for investors. This article provides detailed and specific information for investors to get a head start on their loan modifications.
Should I hire a firm?
You will see a bunch of firms that claim to be able to help you with the loan modification, saying that having an attorney on your side will boost your chance of success. The truth is that the attorney at these firms does not work on your case directly. Instead he or she hires a bunch of assistants who take your financial data, fill out forms, and call the banks on behalf of you. These attorney in these firms is a means for them to charge retainers up-front before you even know their quality of work. The assistants will not know your situation better than yourself, so they generally aren't worth the cost.
Think about how many client files these assistants handle a day coupled with the frustration of having to deal with banks' overworked negotiators, who go through thousands of files and voice messages daily. You can imagine the hoops you have to jump through in order to get a status update from the chain of people handling your file. Most of the investors we talk to ended up tossing the firms they hired (after wasting money on the up-front lawyer retainer) and started over the process on their own. Most have more success this way.
This does not mean you will have no hurdles in trying to get hold of your bank negotiator or getting the correct financial data through to the banks, but you will have one fewer layer between you and the bank.