Mortgage modifications have grown quite popular in recent months, and the latest headlines have gotten many homeowners thinking.  A column published by the local San Francisco Chronicle recently caught my attention and has also infuriated many individuals. The title of the article was, “Are you an idiot to keep paying your mortgage?” Pretty strange right? Well, interestingly, some homeowners have purposely stopped paying their mortgage in hopes of becoming eligible for a loan modification.

First of all, a typical mortgage modification involves lowering the mortgage’s interest rate, term, or principal balance to help reduce the monthly mortgage payment. Between rising unemployment and freefalling home prices, homeowners are looking for any and all ways to save money; and in many cases, simply save their homes. Recently, some homeowners have been looking to take advantage and essentially game the system to save on their monthly mortgage payments. If you’re considering this highly controversial “solution”, or know someone who is, it would be in your best interest to know the rules of the game ahead of time.

Before I go any further, if a mortgage modification is truly warranted, there’s no need to hesitate. If you are facing some financial hardship like a job loss, there’s no doubt that you should immediately contact your lender. But, for folks who are current on their payments and have the funds to continue paying their mortgage–here are some of the rules you should be aware of.

• Rule #1 The 90 Day Delinquency
  In order to qualify, many lenders will require that you have defaulted on your mortgage. Typically, the default will need to be at least a 90 day delinquency on your mortgage.  For troubled homeowners, this 90 day delinquency usually can’t be avoided and is just part of the situation. Unfortunately, this 90 day mark has also become a target date for homeowners looking to take advantage.
• Rule #2 Proof of Hardship and Certified Evidence
  To prevent fraud and abuse, lenders will require proof of the hardship or some supporting evidence. Proof and evidence will vary with each lender, but the ultimate goal of this certification is to ensure homeowners don’t purposely miss their mortgage payments; an act which seems to occur more and more.
• Rule #3 Credit Impacts
  A Fair Isaac spokesman commented and said “risking your credit score for a lower mortgage rate is like playing chicken on the lending highway”. For those in need, a 90 day late is much more favorable compared to a foreclosure on your credit report. However, a 90 day late becomes a serious gamble for those simply looking to lower their monthly mortgage payments.  Risking your credit score during an economy with tightened credit could end up costing you even more money in the future.

So, should you stop paying your mortgage temporarily because of these mortgage modifications? Judging by the numbers alone, a move like this could make financial sense. But based on the rules and regulations, morality, illegal activity, and fraud quickly become a serious concern.  Depending on your specific area and lender, the situation is likely to be different - but one thing is for sure, if you plan on playing this “game”, it definitely pays to know the rules ahead of time.

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