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Simple Overview Of The Mortgage Modification Procedure

By: Nick Adama Click author's name for more of his/her articles

If you are facing foreclosure, or have a loan payment that is too high, then you've probably thought about getting a loan modification. A loan modification is when the terms of a loan are permanently altered to allow a reduced payment.

The lower payment is achieved by either lowering the interest rate, lengthening the term, or forgiving a portion of the balance to be more in line with the current market value. In most cases, a combination of one or more of these options are used to reduce the loan payment. There are other creative ways to reduce a payment with a modification also, but they all center around the term of the mortgage, the payoff, and/or the interest rate.

Here is an easy example of how a loan modification can lessen the payment, using each of the three options above.

Method #1 – Lowering the interest rate

Lets assume the loan balance is $200,000 and the current interest rate is 7.75% and the payment amount is $1,750. Lets also assume this homeowner has 20 years left on a 30 year mortgage. The borrower can no longer afford this payment because of a job loss. They can afford a $1,250 payment, so the lender agrees to reduce the interest rate to a fixed rate of 4.25% for the remaining life of the loan. This will give them a payment of $1,240, without the need to extend the term of the loan or lower the payoff amount..

Method #2 – Extending the term of the loan

Lets use the same example above, only this time, we'll assume the homeowner can afford a $1,500 payment. The loan amount will still be $200K and the interest rate will still be 7.75%. But in this situation, the bank was not able to reduce the interest rate. This happens quite often, because the investors on the loan are not willing to accept a lower rate. In this situation, extending the term of the loan will make the payment affordable again and the investors will keep their 7.75% interest rate. The $200,000 payoff is re-amortized over a 30 year period to get a new payment of $1,430. Everyone is satisfied because the foreclosure was stopped and the new payment is affordable.

Method #3 – Lowering the payoff amount

In order for a payoff amount to be reduced, the value of the house must be lower than the payoff amount. In a few cases, servicers will reduce the payoff amount without this stipulation, but it's unlikely. To get the payoff amount reduced, you must prove to the servicer that foreclosing on the house will cost more than lowering the payoff to make the loan affordable again.

In this situation, we'll assume the home's current market value has been established at $179,000, but the payoff is still $200,000. If the lender forecloses on the house and tried to re-list it, their estimated loses will be 30% of the home's value. So after foreclosing on the house and re-selling, they will receive approximately $125,000, if they are lucky. Most servicers expect to lose 30%-60% on every foreclosure property, so this amount is being very generous.

By allowing the existing owner to keep the house, with a new affordable payment, they can continue servicing the loan and collect the full value, plus interest. This is a much better option for the lender, assuming the new payment is affordable. By reducing the payoff to $179,000 and keeping the same interest rate and 20 year term, the new payment is $1,470, which now fits into the homeowners $1,500 budget.

Using All 3 Solutions At The Same Time

When dealing with my clients, I generally try to get the lowest possible payment, which would mean lowering the interest rate and payoff, while lengthening the term to 30 years. By negotiating all of these items, a new payment of $880 could be fixed for the life of the loan. A well trained loan modifier knows exactly how to get the lowest possible payment in the shortest amount of time.

Negotiating with underwriters is all a matter of having the right experience and being prepared. It's not something most people can achieve on their own, regardless of what many people may think. A loan modification is the answer to saving and affording your house. Negotiating your case wrong can not only cost $1000's but it can cost you your home!

In the previous example, the difference between a good modification and a bad modification adds up to over $100,000 in extra payments over the life of the loan! So even if you are successful with a modification without a professional, it could still cost you over $100,000! If you don't completely understand the modification process, or don't have confidence in your ability to get an agreement, make sure you hire someone to help immediately. There is no time for "learning as you go" when a single error could cost you your home!

Article Source: ABC Article Directory

About The Author: Nick writes for the ForeclosureFish website, which gives homeowners the advice and resources they need to avoid foreclosure by themselves and fight back against the bank's lawsuit. The site describes various options to save a property, including foreclosure loans, deed in lieu, loss mitigation, stopping a sheriff sale, bankruptcy, and more. Visit the site on the web to read more about how you can avoid foreclosure and eviction, repair your credit, and establish a long term financial plan once a financial crisis is over: www.foreclosurefish.net/