The unintended consequences of a modified mortgage
Frank J. Tarala Jr. Principal Brokers Network The Frank J. Tarala Agency 586-215-9933 firstname.lastname@example.org GMAR President Elect 2014 Frank Tarala offers this:
I have spoken to people who have modified their mortgage and have come to find or realize later consequences they did not realize.
Situation A, a couple years ago an owner modifies their mortgage to a longer term, lower interest, reduced principal and payment. With home prices up and their financial situation stabilized, sought to sell the modified mortgaged property only to learn that the bank would be owed the balance of the original mortgage amount, ending those possible two sales, their home and the one they would buy.
Situation B, in an emotional panic over possibly loosing their home, owner agrees to similar terms in Situation A with the mortgage being extended to forty years. Owners are now realizing they will be 100 years old if they pay off the mortgage!
Plus if they try to sell, they too may owe the balance of the original mortgage amount, not the reduced principal figure. In hind sight, long term consequences were not considered when making there decision.
HOW DOES THIS HAPPEN?
When there is a modification that condition must have been "buried" in the terms of the modification. The transaction I am familiar with that had this circumstance (thankfully it was not me but easily could have been), the sellers where not aware of this until after they had accepted an offer and a payoff was requested. If I where selling a property that the sellers where involved in a modification, we would want to verify the sellers obligations to any previous balances before entering into a contract to sell.
Also for what it's worth, we are learning that modification loans do not trigger the same HUD requirements to a borrower that a new mortgage or refinance would. Example is the Truth in Lending (TIL) Disclosure that discloses interest rate, annual percentage rate, amount being financed and the finance charges if the buyer stays the entire term of the note, principal and interest payment, any escrowed amounts and other smaller details like late fees and if the note is assumable. Absolutely required on new mortgages and refinances, not required on loan modification.
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