Real Estate News


Loan Modification Agreements and the Settlement Surprises They May Present

Sponsored Partner Content by Ekko Title

By Mark Barrett and Karen Daily

Contract signing

During the Great Recession many homeowners found themselves struggling to make their monthly mortgage payments. If they were lucky, their lender might have agreed to a loan modification making the customers payments more manageable and allowing the homeowner to avoid complicating their predicament further.

Fast forward to today’s market and those same homeowners are now ready sell. What those sellers may not realize is that many lenders only agree to modify the terms of an existing loan subject to a ‘Shared Appreciation Amount’ provision.  

So what is “shared appreciation”? If your seller successfully navigated a loan modification during the recession and is now looking to sell their house, it may be necessary to review the loan modification documentation your clients executed to establish whether they are subject to a loan condition, which requires the sellers pay an additional Shared Appreciation Amount at the time of paying off their loan.

If the lender required this agreement, your client’s loan modification documents will detail the method of calculating the Shared Appreciation Amount – typically a percentage of the difference between either the gross sales price or market value and the deferred principal balance, less any capital improvements made after the modification.  

Generally speaking, lenders will base any calculation on the sale contract’s gross sales price as long as the transaction is arms-length. This will require the buyers and sellers to sign an affidavit stating that the transaction is at arms-length. If not, the lender may require an appraisal be performed on the property to establish the current market value. Should you suspect your client is subject to such an agreement, you should ask them to provide you with the loan modification documents as early as possible and establish prior to contract ratification what conditions your clients agreed to, and what may be necessary to satisfy those provisions.

It appears most lenders take capital expenditure into account when calculating the appropriate amount and most use the IRS guidelines for capital improvements requiring sellers to submit receipts showing the repair made, the cost, and the information for the contractor performing the repair (phone number and license number) if they are to be deducted from, or included in, the amount to be repaid.

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