So, you decide to sell your home, find a Realtor to list and market it, get under contract, and then two weeks from settlement you get a nasty surprise: that $30,000 you thought you were getting from the sale to put down on your next home turns into a debt that forces you to bring $30,000 to the table instead.
Whaaaaat???? What just happened?
Can you buy that new home you were dreaming of?
This is a real issue that is happening to buyers and sellers of real estate with increasing frequency, and you don’t want it to happen to you. So what is it?
The sellers forgot they had a loan modification.
What Is a Loan Modification?
When borrowers ask their lender to modify the terms of the original loan, often because of some kind of financial hardship, typically to lower the monthly payments, that’s a loan modification. The type of modification that causes the issue when selling is called principal forbearance.
In a principal forbearance loan modification, the lender agrees to take a portion of the unpaid debt and add it to the end of the loan as a balloon payment, so your payments are lowered but you still have a balance looming at the end of the loan. And that’s where you can run into serious trouble because that money has to be paid back. And that often means sellers with a loan modification get a big surprise when selling their home.
When an issue like this comes up during the home-selling process, it’s painful for everyone involved. The sellers may have to bring funds to settlement, and maybe they don’t have enough to do that. The buyers may have already made plans to end a lease or sell their home, so they need the deal to go through. And everyone has made plans with movers, notified utility companies, changed or canceled subscriptions, and so on. The impact is huge.
Why Is This Happening More Lately?
This issue is surfacing more often now because many people requested and received loan modifications as part of the Home Affordable Modification Program (HAMP) during the market crash a few years ago, and not everyone remembers or realizes that they will have to pay back a sizable amount of money when they sell their home.
It may seem strange that borrowers could forget or not understand this critical issue, but when people are in a hardship and they are looking for a lifeline, they may not pause too long to read the fine print. When you’re drowning in the water, you don’t take the time to read the life preserver. So sellers may not remember, and not all listing agents are savvy enough to find out either.
How Can You Avoid Problems with Loan Modifications?
There are a few steps you can take as a seller to keep this issue from biting you. If you decide to sell your home, whether you remember about a loan modification or not, follow these three steps to make sure you know your numbers BEFORE you list it for sale.
- Read Your Most Recent Loan Statement. HOWEVER, it may not be perfectly clear on your statement whether any loan modification exists and it may therefore be a little more difficult to determine the total amount you owe. There may be a section on your statement that mentions an amount that is not interest bearing, but the average consumer may not know enough to take that number into consideration and to add it to the balance due. It’s also possible that the loan modification amount may not even be on the statement, depending on what you receive from the lender.
- Call For a Payoff Amount. BUT, make sure you ask the lender for the full payoff amount and whether any loan modifications or pre-payment penalties exist. The lender may charge you a small fee for that – $25 to $50 or so – but it’s worth it to have a definitive number. Better to pay that small amount up front than to not realize it and have the deal implode down the road. And the payoff amount will also help your agent to calculate what you would net from any particular deal, so it’s an important number to have anyway.
- If you have a loan modification, meet with your Realtor immediately to discuss options. You may still be able to sell your home, but you’ll need to understand the full impact on both how the sale may be able to proceed and your ability to purchase your next home. You may be able to move forward immediately or it may make sense to wait. So talk to a professional who understands how to navigate the issue and who can help you sort it all out.
Don’t Forget about Down Payment Assistance
Another somewhat related issue we are seeing is sellers who purchased their home with CDA (Community Development Administration) or MMP (Maryland Mortgage Program) funds to assist with their down payment. Although it’s not a loan modification, loan assistance programs of this type have impacted many sellers recently. If the borrowers used funds from a state or local government program to help with purchasing their home, those funds, sometimes couched as a grant, may still need to be repaid when selling the home, especially if the borrower hasn’t lived in their home for at least 5 years.
The amounts are typically smaller than most loan modifications – more in the neighborhood of $5000 to $10,000 – but it’s still a problem. Many times the borrowers who have used these programs are buying lower-priced homes that are more manageable for the first-time buyer. At this smaller price point, $5000 to $10,000 can make a big difference in the deal.
So if you used a grant or deferred-payment loan to help you purchase your home, call your lender to find out what, if any, balance may be added to your loan if you want or need to sell.
We’re Here to Help
As always, if you have any questions about real estate in the Baltimore Metro area, whether it’s buying, selling, or investing, we’re here to help. If you want more information on this topic or you want to know your options if you have a loan modification, just give us a call at (410) 821-3122 or email us and we’ll be happy to sit down and listen and help you determine what makes sense for you.