September 4th, 2009 10:47 AM by Preston Ware
Many borrowers are looking to modify their mortgage when there is an easier refinance alternative right in front of them.
Don’t try to modify mortgage just because you owe more than your home is worth. Reuters reported today that the Obama administration is behind on their goals for mortgage modifications and is still seeking alternative ways to help homeowners hang on to their homes. What many people are not aware of is that government sponsored enterprises such as Fannie Mae and Freddie Mac have relaxed some of the mortgage guidelines when it comes to existing homeowners who have lost value in their homes. Many times when I call upon a customer I begin to qualify them for a refinance and they tell me they are in the middle of a loan modification. When I sit down and do the math I end up asking the question “why don’t you just refinance your mortgage?”. If you have a perfect mortgage history, you should be looking at a refinance first before any talk of a modification.
The Home Affordable modification program is running behind on its goals because the pipeline of modifications that was in process had to be looked at all over again based on the new set of rules that came out on April 1st, 2009. There are people out there who have been trying to modify for eight months now. If they succeed their credit will reflect this and their credit scores will be compromised. When a bank does a modification they look at net income (after taxes) and every single expense in the entire budget of the household. This includes food, gas, electricity, car insurance, phone, cable, entertainment, etc. When a lender analyzes a refinance they look at gross income (before taxes), the mortgage payment and the debts that appear on the credit report. A loan modification is quite often granted to someone with a 100% to 110% debt ratio. A mortgage loan is often granted to someone with a debt ratio of 30-50%. (Mortgage and consumer debt compared to gross income.)
Here are some startling facts for borrowers who are thinking of modifying who really fall into the other side of the Home Affordable legislation. (The mortgages refinance side)
Banks are looking at present values and previous values now. In some cases they will take into account the value three years prior and compare. Florida, California did you hear this? If the only issue is that the customer is upside down, we have a legitimate shot at the loan. In some cases we can get an appraisal waiver to completely avoid an appraisal. In other cases we can do a manual underwrite and get a loan up to 125% of the value of the home. Even more, in many cases, we can do the same loan without verifying income.
A loan modification requires that we show the problem, like a layoff or a cut in income, and then we show the fix or some underlying reason why we should give this person a second chance. A mortgage loan looks for continuity in pay and work history. It has been my experience that customers who are current on their mortgage get turned down for loan modifications where customers who are current on their mortgage have a very good chance of getting approved for a refinance. If the only problem is that you are upside on your home you should be looking at the Home Affordable Refinance program through either Fannie Mae or Freddie Mac. Modifications stretch the term of the loan first, lower the interest rate second, lower the balance third, hardly ever. A refinance will lower the rate from say 6.625% to 5.125% and save approximately $130 to $500 a month and the work is done in 3 weeks to a month with no adverse effects on the customer’s credit bureau. Rates are expected to stay low until about the end of the year when the Federal Reserve is expected to stop purchasing American mortgage backed securities.
Written by Preston Ware, First South MortgageTel: 704-542-8057http://www.prestonware.comEmail firstname.lastname@example.org