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My mortgage company says I should modify my loan. Should I be worried about that?

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Posted On: 03/26/2008

Q: I’m behind on my mortgage by two months. The mortgage company said we should do a loan modification. I’m worried because I’ve had nothing but problems with this lender. I cannot refinance with anyone, due to the fact I have just finished my Chapter 13 bankruptcy. With the market in my area being so poor, I could not sell at this time even if I wanted to. I am very worried about foreclosure. If I stayed current from this day forward after doing a loan modification should I be worried?

A: What better alternative do you have? It’s likely that you can’t sell, can’t refinance and can’t continue with the present loan. That the lender has offered to modify the loan is at least a good start.

The question is: What kind of modification or repayment plan? Something that will lower your monthly costs and improve your situation, or something that will make matters worse?

Lenders are doing more modifications today because of pressure from regulators and government officials. They have also figured out that a typical foreclosure results in a huge loss, about $40,000 per property according to some estimates. Given this situation, it’s in the mutual interest of both the lender and the borrower to work out something that makes sense for both.

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Ask your lender what options they can make available and then run the choices past your attorney.

And yes, if you can make timely payments once the loan has been modified your credit will improve, your lender will be elated and you will likely have a lot less anxiety.

Q: Can I privately raffle my home?

A: No. A “raffle” generally is considered a form of gambling, and gambling with exceptions for governmental agencies and nonprofit organizations is a no-no. What you may want is something with a test of skill, a “contest” with rules and independent judges. For instance, a contest where the winner is decided by the best essay regarding a given subject, such as “Why I want this house.”

To have a contest you need to resolve certain questions: What will you charge per entry? If you only get nine entries will you still have a winner? Will you have a reserve price? Who will be your independent judge - and how will you pay such a person? Will you have an escrow account to hold the money?

Go no further with this until you have an attorney assure that you’re in compliance with applicable laws. Also, have your lawyer check postal regulations – private gambling and lotteries by mail are prohibited. Alternatively, let a charity raffle the house for you.

Q: I need to lock in my interest rate today. My rate would be 5.5 percent with 1.1 points. This is the lowest I have seen so far. Do you think I should lock? Closing is in four weeks.

A: If this quote is for a 15-year or 30-year, fixed-rate loan, and if you have not found anything better, then why not lock?

If you look at mortgage rates during the past 50 years you will find relatively few times when financing at 5.5 percent has been available.

However, if this is an adjustable-rate product or some form of toxic financing, then the rate being quoted is not the rate you’ll be paying when the loan resets. Given current problems in the mortgage marketplace, borrowers are likely to do best with plain-vanilla, fixed-rate loans because then resets, prepayment penalties and rising rates are not a worry.

Q: I’m currently the owner of a property with two houses under rent control. They currently pay $50 per month. I was just wondering where I can find out what I can possibly do to raise the rent to meet expenses and earn a reasonable profit?

A: Did you buy these properties knowing about the rental rate and rent control? If yes, why? What is it that makes these properties attractive?

Over the years rent-control programs in many communities have been modified to create exceptions for small landlords (those, say, with four or fewer units), hardship, substantial rehabilitation, etc. Your first step should be to speak with the local rent-control agency to determine whether your property actually is covered and to see what grounds are available to raise the rent.

Because exceptions may not be automatic, you will likely need approval from the local rent-control agency. For specifics, speak with the agency and also see if an attorney or legal clinic is available on a pro bono or reduced-cost basis to provide assistance.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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