Selling Your Home During Loan Modification

Loan Modification is a solution to a problem of mortgage affordability.  If a mortgagee is experiencing a financial hardship and needed a lower mortgage payment, the mortgagor may reduce the interest rate of the loan.  However, these modificiations are temporary and often carry terms that the mortgagee may not understand, particulary when it comes time to sell your home.  Let me give you an example. 

I recently represented a couple that sold their home to upgrade to a home with more bedrooms.  They were expecting a second child.  And while they were slightly upside down in their mortgage, they had just enough money to bring to the settlement table to make up the difference. 

This couple had a very rough two years.  The husband, the sole provider for the family, was severely injured in a motorcycle accident just before the birth of their first child.  He was lucky to survive the accident, but the road to recovery kept him out of his job as a firefighter for more than one year.  The wife, at home with their new daughter and unable to work, was falling behind on mortgage payments and contacted the mortgage company.  The mortgage company modified the interest rate on the loan, dropping the monthly mortgage payment significantly.  The wife was told that there would be no repercussion for the temporary modification.  She was able to continue making payments and stay in her home.

As her husband recovered and eventually got back to work, life was looking good.  And they soon decided to make another addition to their family.  They contacted their mortgage company to find out what consequences there would be to selling their home since they were still on a loan modification, and if they should be come off the modification since things were back to normal.  The mortgage company representative explained there was no penalty and that they should stay on loan modification as long as they could. 

When I took the listing, I had the wife call the mortgage company one more time to make sure that there would not a financial penalty when they went to payoff the loan.  Again, she was told there would be none.

The morning of settlement, the title company gave us a copy of the HUD-1 settlement statement showing a loan payoff that was $4,000 higher than my clients had anticipated.  The bank had stalled getting the payoff to the title company and now the payoff was $4,000 higher than my sellers had anticipated.  They were squeezing every dime out of their savings to make this move for their family.  They didn't have $4,000 extra.  And they would be settling on their home purchase in two days, but that would be impossible if they couldn't sell first.

The wife was on the phone with the mortgage company immediately.  The reaction this time was much different that prior calls.  The mortgage company said:

"If we had known you'd be selling the house during the loan modification period, we would have never approved you.  You are being charged the difference in the orginial interest rate and the modified interest rate."

As a Short Sale Listing Agent, I was not at all surprised by this turn of events.  The folks that try to do the right thing, are pro-active about informing their mortgage companies about changing circumstances, are inevitably given the shaft.  Mortgagors are very short sighted when they think there is a way to hold someone over the fire and get a few more bucks out of them.

The terms of my clients' loan modification, like so many that get approved for loan modification, was not put in writing for them.  They were relying on a verbal descripton.  When it comes to loans, terms need to be in writing.  If the terms of your loan modification are not put in writing, who knows what you are signing up for.

Thankfully, my clients had generous family members who understood that helping this young, growing family was the right thing to do.  The wife will continue to fight the large lender that willing records all phone conversations, but gives no written terms to loan modificaiton. I hope she makes an impact for future families who find themselves trying to do the right thing, but getting penalized in the process.

Chris Ann Cleland, Realtor- Licensed in Virginia, GRI, SFR, Short Sale Specialist. Affiliated with Long & Foster, 7526 Limestone Drive, Gainesville, VA 20155.  To contact Chris Ann, call 703-402-0037 or email chrisann@LNF.com.

Blog Header is a picture taken near the entrance to the Active Adult Community of Regency at Dominion Valley in Haymarket, VA.