Loan Modifications

Loan modification is a process where the terms of a mortgage are modified outside the original terms of the contract agreed to by the lender and borrower (i.e. mortgagor and mortgagee). In general, any loan can be modified.

Background

In the normal progression of a mortgage, payments of interest and principal are made until the mortgage is paid in full (or paid-off). Typically, until the mortgage is paid, the lender holds a lien on the property and if the borrower sells the property before the mortgage is paid-off, the unpaid balance of the mortgage is remitted to the lender to release the lien. Generally speaking, any change to the mortgage terms is a modification, but as the term is used it refers to a change in terms based upon either the specific inability of the borrower to remain current on payments as stated in the mortgage.

Types of modification

Mortgages are modified to the benefit of the borrower in one or more of the following ways:

  • Reduction in interest rate, or a change from a ARM/variable rate to a fixed rate, or in how the ARM/variable rate is computed
  • Reduction in principal
  • Reduction in late fees or other penalties
  • Lengthening of the loan term
  • Capping the monthly payment to a percentage of household income

The borrower can be current, late, in default, in bankruptcy, or in foreclosure at the time the application for modification is made. The programs available will vary accordingly.

There may be modifications made at the discretion of the lender. The lender is motivated to offer better terms to the borrower because of the expectation that the borrower might be able to afford a lower payment, and that a performing loan (i.e. one in which payments are current) will be more valuable ultimately than the proceeds obtained from a foreclosure sale.

Making Homes Affordable or better known as the

http://www.makinghomesaffordable.gov/

The Obama Plan was introduced on March 4th 2009. It is a very helpful plan but NOT everyone is qualified. You can go to the above website and answer some very basic questions to see if you are qualified. Qualifying and being Approved are two different outcomes. So having the right help in filing out the financial paperwork is critical.

Bottom Line

Banks and Servicers do not make Loan Modifications easy to be approved. Banks aren’t in the business of lowering payments easily. From their perspective you have signed a contract and should live up to it! But it is also true that the Banks are responsible for offering the risky loan products marketed and funded to their customers! “Stated Income”, “Interest Only”, “Teaser Rates”, with loans up to 100% of the value of the home was a recipe for disaster!

So if you find yourself in a loan you can’t afford seek the advice of an Attorney and or  Tax Advisor: The following is what worked best in my loan modification.

  1. Call your Bank and tell them you want to pursue a loan modification. Burying your head in the sand won’t help.
  2. Now that you’ve faced the problem of your delinquency and called the Bank, have them send you “Their Version of a Loan Modification Application”. All Banks and Servicer’s  are different and have their own way of applying for relief.
  3. DO NOT ANSWER FINANCIAL QUESTIONS ABOUT YOUR INCOME OR EXPENSES ON THE PHONE! The seemingly friendly “trained associates” on the phone are there expressly to gather information. These first line “trained associates” of Your Banks Loss Mitigation Department are NOT there to negotiate your loan modification. Tell them politely you would like to carefully fill out your financial information yourself and to please send you a Loan Modification Package to your home. If you make mistakes declaring your income or expenses on the phone you may jeopardize your chances for a loan modification! Don’t Panic. Take a depth, breath, and be sure to package your application properly at home and NOT ON THE PHONE!

Remember the first words spoken to you each time you call your Lender, by their “trained associates” by Law is…..

“We are a Debt Collector and ANYTHING YOU SAY will be used for that PURPOSE!”

  1. Send a completed package by fax or Certified Mail. I have found Banks prefer a fax. Call within 48 hours to confirm receipt of Loan Modification Package.
  2. Find a Professional who has the financial expertise in understanding your particular income and expense budget, or profit and loss statements, and can properly package your application to your Lender. Packaging your Application is the KEY to SUCCESS! This is NOT a process for a Novice! Choosing whom to help you, I believe, is the hardest decision for the borrower. Everyone and their Grandmother is NOW presenting themselves as a Loan Modification Expert! Whom to Believe? HUD and the Banks tell us that their Services are FREE!  and to “Beware of anyone who asks you to pay a fee in exchange for a counseling service or modification of a delinquent loan”. “A HUD approved Counselor is Free”? Well true and NOT true. The HUD Approved Counselor doesn’t charge you a fee directly but is certainly paid by the U.S. Govt. through Salary or Grants. The Banks “trained associates” don’t charge counseling fees , but whom for are they working, You or the Bank ? What you should be MOST concerned about is WHICH of the PAID vs. FREE services available to you, REALLY know how to complete a Loan Modification? And in who’s best interest are they working. It’s not an easy decision to make, but take your time and ASK a lot of questions before you decide who has the best chance in getting your loan modification completed.
  3. If you have any questions you can send them to me below.

Disclosure: I am NOT a Lawyer or Tax Advisor. I am not giving any legal or tax advice on this Blog. I urge everyone to seek Legal and Tax Advice before they proceed with a Loan Modification or Short Sale.

Uppitybanker

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