When A Loan Modification Is Recommended

For those with ARM loans, high monthly payments, balloon mortgages that cannot be refinanced, or mortgage arrears, loan modification may be an option. When should someone try this?

Lenders have shown a willingness to work with borrowers rather than foreclose. Most lenders realize that foreclosing on real estate in a down real estate market does not make good business sense. I have blogged on this topic before – my articles can be searched using the FIND option to the right.

For many, it often comes down to a choice between Chapter 13 bankruptcy or loan modification. There are times when one choice might be better. For example, Chapter 13 may make more sense for someone who can qualify to substantially reduce unsecured debts – in some cases a homeowner can keep their house, catch up on arrears and pay credit cards a low payment such as 10% over 5 years. For someone with a lot of unsecured debt, or who is being sued by credit card companies, Chapter 13 can stop the lawsuits automatically and give them time to repay debts while saving thousands of dollars. Loan modification cannot do that. Chapter 13 is also a good option for someone who has already had a loan mod application denied but who has sufficient income to repay debts over 5 years while continuing to make regular mortgage and car loan payments.

In many cases, the strategy we use is to first try the loan mod submission and use Chapter 13 as a fall-back. So long as the unsecured debt is manageable and there are no immediate threats (i.e., garnishment or bank account levy by a judgment creditor), it may make sense to focus first on solving the mortgage problem.

Which way a client should go needs to be reviewed on a case by case basis by a local licensed attorney. Homeowners who rely on “loan modification consultants” (a new fictitious type of scam artist) are making a big mistake. There is no such thing as a loan mod consultant in New York – they are just people trying to practice law without a license. This is illegal but it appears to be rampant. Why entrust your home to the advice of someone who themselves is comitting a misdemeanor by the unauthorized practice of law? Loan mod work goes beyond just filling out some forms. Your entire financial situation and other legal alternatives should be considered. A lawyer may also be able to help a homeowner gain leverage by using legal defenses or claims against a lender. And, needless to say, only a local licensed lawyer can actually represent a client in a pending court case such as a foreclosure action.

In my midtown New York office, I review these type of issues every day with clients and new callers. We offer free phone consults. If you may need some help with your home or mortgage, please feel free to call me at (212) 764-7250 x 201.

Scott