Real Estate Q&A: Should I Skip Mortgage Payments If I Want a Loan Modification? Does Flood Insurance Offer Enough Coverage?

Zillow real estate investment writer and long-term investor Leonard Baron, MBA, is answering questions from MintLife readers.

If you have a question about investment properties, cash flows, insurance, mortgage financing, homeowners associations, renting versus owning, foreclosures and more, drop Leonard an email.

Loan Modification

Megan of Reno, NV asks:

I am current on my mortgage but in severe financial distress. I just spent six months trying to get a loan modification from one of the nation’s largest banks.

They requested all my income and expenses, and told me up front that I was “pre-qualified,” so I was hopeful.

I must have faxed, mailed and emailed at least 50 documents, most of them I sent in at least three times – some six times!

Then they said no to any loan modification. Should I skip some payments to get their attention?

 Answer: In most cases, banks will not issue a home loan modification unless a borrower is in default, regardless of the borrower’s financial condition.

I’m sure some people have received modifications even though their mortgage is not considered delinquent, but I understand that’s the exception not the norm.

Whether or not to skip a few payments is a tough question. Here are a couple of things to consider:

First, if you skip payments, derogatory marks are most likely going to appear on your credit report. The severity of damage to your credit is hard to estimate.

I know of people with great credit who stopped paying their mortgage and did a short sale.

Luckily for them, their FICO® score wasn’t severely impacted: they went from pre-short sale credit in the 800s down to a 720 score, which is still pretty good.

Second, there are several things affected by your credit score.

Not only can it impact your financing costs and insurance premiums; your credit score can also affect your ability to get a job in some states.

If you think you can muster through the financial distress without defaulting on your loan, that’s probably best.

If you have no other choice but to default on your loan, don’t default on all your other bills too. This way, you only have one lender to deal with.

Hopefully, they’ll take notice and grant you a modification, so you can get back on your financial feet. Best of luck!

Flood Insurance

Mike of Colorado Springs, CO asks:

I’m looking at properties in my area and some are in flood plains. I know I can get – and may be required – to carry flood insurance.

Do you think that’s enough or are there other risks involved with buying flood-area homes?

Answer: Floods can be devastating to a homeowner’s livelihood. Even if you have insurance, it could take weeks, months or years to collect insurance proceeds and fully recover.

Most flood insurance is provided by the Federal Emergency Management Agency (FEMA).

Unfortunately for residential flood insurance, the maximum coverage is $250,000 for the structure and $100,000 for personal belongings.

If your house and belongings are of greater value than those limits, you won’t be fully covered.

You may be able to get supplemental flood coverage above those limits from Lloyd’s of London insurance, but it is not cheap.

Meanwhile, FEMA premiums could easily soar, and limits on losses could decrease over time depending on a multitude of factors.

Unfortunately, buying properties near flood plains, rivers, mud-slide areas and beaches have a higher risk of loss from water issues that are not covered by most standard homeowner’s insurance policies.

By purchasing a property with any one of these potential issues, you take on a lot of risk.

What if you prudently paid off your home over the next 20 years just to have it wiped away by a water “event”?

A flood could destroy your lot, making it unbuildable and, hence, worthless.

My advice? Think it through and make sure the price of the property is worth the risk.

Leonard Baron, MBA, CPA, is Zillow’s real estate investment writer, a San Diego University lecturer and real estate due diligence expert. As America’s Real Estate Professor®, his unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions.