Definition of a Loan Modification A Loan Modification is a change to the original terms of a mortgage. When a borrower purchases property secured by a mortgage, the Lender will specify the terms of the loan. These terms include Interest Rate, Amount of the Loan, Term of the Loan (number of years until the loan is paid off), Monthly Payment, and Amortization Schedule. If the Borrower is unable to make the scheduled payments, then the Lender/Bank has some tough choices. The Lender may decide to Foreclose, accept a Deed in Lieu of Title or Short Sale or engage in a Loan Modification. All of these choices force the Borrower out of his home except Loan Modification. If the Borrower can prove to the Lender that he has the ability to repay the loan if the Lender agrees to alter some of the terms, the Lender may agree to “Modify” the loan. Here are some of the changes that may be made: |
- Temporarily reduce the Interest Rate
- Permanent Interest Rate Reduction
- Change Amortization Schedule to allow an Interest Only loan (no principle repayment for a number of years)
- Extend the Term of the Loan.(ex. Stretch out the Loan from 30 years to 40 or 50 years)
- Any combination of the choices listed above.
The process of loan modification is an attempt to construct new loan terms where the borrower can consistently pay the mortgage payment plus all other household bills. The lender does not want to place the borrower in the situation where the mortgage payment consumes the major part of the family budget. The lender will take into account the entire budget, including car payments, utility bills, food, and credit card payments. The lenders “loss mitigation” department will consider all expenses that the borrower will incur to live a normal life.
You must understand that a loan modification is a negotiation. You must present a clear and accurate proposal backed up by documented expenses and income. You will notice in the Forms section of this kit an Income and Expense Form. This form is a calculation of your after-tax monthly income and your soft and hard expenses. Hard expenses are those costs over which the borrower has little control. (Ex. Car loan payments, utilities, student loans) Soft expenses are discretionary costs which the borrower has some degree of control. (Ex. Food, car mileage, entertainment) Note: Overestimating the soft expenses will have the effect of lowering the amount available to pay for the mortgage thus giving the borrower more cash to spend monthly. Your modified mortgage payment is amount you can consistently afford and still live a normal life. It is the difference between your Income and Expense.
What terms of a loan can the bank modify?
First, the lender needs your notarized written permission to change any terms of your loan.
Interest Rate Reduction
Example I
The easiest way to modify a loan is to lower the Interest Rate. When the interest rate goes down, so does the monthly payment.
A homeowner has a mortgage loan for $250,000 at an interest rate of 7.50% amortized over 30 years.
The monthly payment at 7.5% is $1748.04.
The lender agrees to lower the interest rate to 4.50%
The monthly payment at 4.5% is $1266.71.
Savings is $481.33.
In addition, the sum of the total payments over the life of the loan decreases.
Amortization Term Increase
Example II
The typical mortgage term is 30 years. The loan is “amortized” or paid back with principle and interest over a 30 year period. In order to make the loan more affordable, the lender may offer to extend the term of the loan to 40 or even 50 years. Here is the effect on a $250,000 loan at 7.5% for 30 years:
30 Year Term Loan. Monthly Payment is $1748.04
Now, extend the Term of the loan:
40 Year Term Loan. Monthly Payment is $1645.18. Savings is $102.86
50 Year Term Loan. Monthly Payment is $1600.58. Savings is $147.46
Notice that the savings is small but the total payments over the term of the loan increases dramatically with an Amortization Term Increase. (a great advantage to the lender) This may be the least attractive option to the borrower.
Principle Balance Reduction
Example III
Of all loan modification options, the Principle Balance Reduction is the most attractive to the borrower. The lender is actually reducing the balance due on the loan. For example, if the original loan was for $250,000, the lender may be willing to reduce the balance down to $250,000 in a severely depressed real estate market. Once accomplished, the lender is required to report this loss to the shareholders, and as a result, Principle Balance Reduction is the least favorite modification to the lender.
The Principle Balance Reduction has the effect of reducing the monthly payment and the total payments over the life of the loan. Example:
Original loan amount $250,000 Principle Reduction $50,000 New Balance $200,000
Interest Rate- 7.5% Term 30 Years
Monthly Payment on $250,000: $1748.04
Monthly Payment on $200,000 $1398.43
Savings is $ 349.61
Not only does this reduce your monthly payment, the Principle Balance Reduction greatly reduces your total payments over the life of the loan.
Frequently Asked Questions
What Does Mortgage Forbearance Agreement Mean?
An agreement made between a mortgage lender and delinquent borrower in which the lender agrees not to exercise its legal right to foreclose on a mortgage and the borrower agrees to a mortgage plan that will, over a certain time period, bring the borrower current on his or her payments. A forbearance agreement is not a long-term solution for delinquent borrowers; it is designed for borrowers who have temporary financial problems caused by unforeseen problems such as temporary unemployment or health problems.
How long does it take to complete a loan modification?
The average loan modification takes between 45 and 90 days depending on the how busy your lenders loss mitigation department is and how fast you deliver your completed Loan Modification forms to that Lender. Lenders are overwhelmed and the volume is only getting worse. Having a clean, organized and easily understood loan modification package delivered to your loss mitigation department can mean the difference in a short time line and an extended time line for a proposal delivered to you for review and approval. If you have more than one property, you can use the same loan modification kit to complete your loan modifications for those properties, too!
How Do I Qualify?
If you are currently behind on your payments and are experiencing a hardship, you may qualify for a loan modification.
What If I'm Already in Foreclosure?
In most cases, we can get the foreclosure process stopped while the attorneys negotiate on your behalf for a loan modification solution.
What If I Have Bad Credit?
This is not a credit based solution; therefore your credit score will not play a part in the negotiation process.
Why loan modification specialists get paid so much for their services?
There are a lot of things that loan officers have to do to make sure the consumer gets the best opportunity to achieve a better interest rate and terms thru a loan modification. The understand how people in the mortgage and real estate industries think and know how to communicate with them. When people speak the same language, results can happen with ease. You’re paying for a professionals years of experience and knowledge base. Sometimes, you’re even paying for people’s connections to get things done. So, when you add the time needed to put an application together, run all the calculations, figure out strategies and handle communications; you can understand why loan modification specialists get paid a lot for their skills. If you get the proper results, then the cost is worth it.
What documents are required for a loan modification?
In order to properly determine whether a mortgage loan modification is appropriate for your situation a variety of factors must be considered. To effectively evaluate your situation the following documents are required.
2 most recent complete bank statements including checking and savings accounts
2 most recent pay stubs
2 most recent state and federal tax returns
2-page handwritten hardship letter
Most recent statements of any investments or retirement accounts
Copy of deed of trust from each mortgage loan
Copy of homeowner insurance policy and property tax bills
Any notices of default or pre-foreclosure
Copy of Driver’s License
Now is the time to begin your work in Loan Modification. The declining phase of the real estate market is the only time that lenders are willing to negotiate new terms for mortgage loans. To lenders, mortgage loans are assets. Lenders stand to lose 50% to 80% of their asset value on a mortgage if they allow it to go into foreclosure. As such, lenders are highly motivated to negotiate new terms for your borrowers. I'm highly trained Loan Consultant standing ready to assist you with Loan Modifications. Let’s get started helping distressed homeowners TODAY!
Who can qualify for a loan modification? General Qualifications for a Loan Modification
You have a variable rate loan and negative amortization
You have a fixed rate loan with a very high interest rate
Your loan requires a penalty for prepayments
Personal or Economic hardship such as death of a spouse, loss of employment, injury, accident, illness or divorce
You are behind payments and unable to become current
There were lending violations in your original mortgage
The qualifications for loan modification vary based on each homeowner's unique situation. The list provided above is an attempt to identify commonalities between most people who qualify. After reviewing this list please contact me to evaluate your situation. Also if you have Additional questions such as the ones bellow feel free to contact us.
- Do I have to be behind on payments to qualify for a Loan Modification?
- Are Lender Loss Mitigation Representatives hard to talk too?
- Can missed payments be included in a Loan Modification?
- Can a Loan Modification help me avoid foreclosure?
- What constitutes a “Hardship Situation”?
- Can late payments be included in a Loan Modification?
- How long does it take to do a Loan Modification?
- How long do I have to start a Loan Modification?
- Will the bank require an interior inspection of my home?
- In utilizing the Loan Modification option to bring an asset current, can the mortgagee include all fees and corporate advances?
- May a mortgagee perform an interior inspection of the property if they have concerns about property condition?
- Can a mortgagee include late charges in the Loan Modification?
- When utilizing a Loan Modification option, can a mortgagee capitalize an escrow advance for Homeowner's Association fees?
- Is there a new basis interest rate which mortgagees may assess when completing a Loan Modification
- Will HUD subordinate a Partial Claim; should a mortgagor subsequently default and qualify for a Loan Modification?