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Easing Payments Through Mortgage Loan Modification Program

A loan modification is not a refinance. There are few, if any, fees involved as a result, and no new mortgage is written. The existing mortgage is simply modified. The modification can be slight or it can be all-encompassing.

loan modification
loan modification

Different Between Loan Modification & Refinances

The main difference between loan modifications and refinances, however, has to do with qualifying. When you apply for a refinance the game is to look as strong as possible financially. The better you look the easier it is to get the refinance approved.

The same goes for purchasing a new home. You are looking to borrow new money from a new source. The lender to whom you are applying is not currently in a position of having lent you money, and they will not put themselves in that position unless they are very sure about your ability to repay. You give every source of income you can muster; even the money you hope to make next year goes on the list.

Time the Bank-account Statement

You time the bank-account statement to coincide with your latest paycheck deposit so that you have more money in the bank, and you dig up those old savings bonds that have been sitting in the safe for years to pile on as additional assets. The stronger the better, so we’re spending most of our time trying to make you look good.

Not so with a loan modification. Getting approved for a loan modification is more like hitting a strike zone. When trying to get a modification, you want to look like you need help. Yet, you don’t want to make it look like you need life support.

What Did The Lender want to Know?

The lender wants to know that under current terms and circumstances, you may struggle (or may already be struggling) to make payments. But, if they help you a little, they will be able to keep your loan performing well into the future and that ultimately you will pay off the entire debt – either over time through your payments or when you sell the home for more than what is owed.

Banks have done these for years. Debt restructuring is another name for it. When markets shift and their borrowers are affected, banks come in seeking to protect their assets. Their assets are NOT your home. The bank’s asset is the loan you owe them. They would like it far more if you paid off the loan than to take over your home. They will work hard to make sure that happens. Modifying a loan is just one way for the bank to protect its assets.

How does it work?

The crisis in the economic sphere has hit homeowners the hardest. When the going was good, and money was easily available, real estate developers did roaring business. Financial institutions, banks were very eager to help home building activities of property developers. Homeowners could get loans on easy terms by mortgaging their homes.

Everything was all right until the economy starts sliding down very badly. The resultant unemployment and loss of jobs affected the home building industry the most. Homeowners could not pay the installments, and lenders were unable to get their money back.

To ease the situation, loan modification programs have been put into effect that is helpful to all sections in the field. The programs involve a permanent change in certain terms of the loan of a borrower which enable such loan get reinstated to become a situation where the borrower can afford to repay the loan.

Reduction in Principle Amount

The situation arising out of economic meltdown affected thousands of homeowners defaulting on their mortgage repayment monthly installments. This has created a very serious situation, in which, a good many of them were on the verge of losing their homes through either foreclosures or auction. One way of meeting the situation, at least for the homeowners, is to renegotiate the terms with the lenders.

One method is to capitalize on the reduced value of the property. Accordingly, negotiate with the lender for reducing the principal amount of the loan. This is a very useful method because lenders are aware that even if they seize the property, they will get only a reduced amount. What is important is that homeowners must not default on payments after the modification.

Reduction Interest Rate

Monthly payments could be made more manageable if the interest rate is reduced through a loan modification program. When the original mortgage documents were signed, the interest might have been specified as a variable one. Many borrowers prefer this option in the hope of getting benefits if the interest rate comes down in the market.

While renegotiating for modifications, it is preferable to agree to a fixed rate of interest. This way, the homeowner will know beforehand, what his monthly commitment would be. On that basis, he can arrange his finances, and there are lesser chances of default.

Increasing Repayment Period

Another way of getting a modification is to get the period of payment increased so that the monthly payment amount is brought down to a realistic level. This may be possible for borrowers who have signed the mortgage for the 15-year period.

This can now be extended to the 30-year period. The homeowner, if he is a skillful negotiator, can also persuade the lender to agree to a temporary suspension of payments for a short period.

How do Loan Modifications Work?

When looking into a loan modification it’s important to get a little refresher on personal finance. A simple loan calculator can help you. I would suggest playing around with your numbers before you contact your bank so that you have in mind one or two ways that a modification might help you.

In every mortgage, there are four components that could be modified:

  1. The rate – interest rate upon which the payment is based
  2. The term – the length of time the loan is still in effect (30 years = 360 months, etc.)
  3. The terms – fixed or adjustable, balloon?
  4. The balance – the amount that is currently owed to the bank

Any and all of these can potentially be altered or modified in a loan modification. I’ve seen loan balances be cut in half and interest rates fixed in for 35 years as low as 2.5%; all in an effort to make your home affordable to you.

So let’s take the case with the recent caller we have been talking about. Her interest rate is currently 7.25%. The loan is a 7-year ARM loan on a 30-year term – she has been in the loan for almost exactly 4 years. That means her loan has 26 years (312 months) left. Today she owes $217,540 on her first mortgage. By plugging the above three bold print factors we can confirm that her payment of principal and interest is $1,551.

Her budget shows that this payment, added to her property tax and home insurance amounts put her at 43% of her income.

Most lenders are seeking to achieve a housing percentage of closer to 30 – 35%. That means she needs to achieve a lower payment by about $400 per month. This would help her afford this home and stay in it.

In order to achieve a lower payment, three numbers in the above equation can be altered. If you extend the loan term from 26 years to something longer, the payment will decrease. If you lower the loan amount, this too will obviously reduce the payment.

But these two options, although possible, are not the bank’s first choices. They generally want to keep the term the same and keep the loan amount the same. That leaves the rate.

If we reduce the interest rate, we can often achieve the goal. So we plug the above numbers into the loan calculator again, but this time solving for a payment of $1151. By entering the loan amount, and the term and an interest rate of 4.25%, the payment becomes $1151. That’s all there is to it.

Home Loan Modifications: The Solution to the Loan Repayment Problems

A loan modification is a change that is made to the loan agreement. The monthly payments become easier to pay after one has the loan modified. The banks propose the loan modification programs, because they are easier as well as more convenient working with the consumers, instead of going after them.

Purpose

The banks have numerous options in case the customer stops making the monthly loan payments. For example, attempt to repossess his property with foreclosure, collect the amount from him or hire someone for this purpose, declare him as bankrupt as well as take some money or just accept the loss by leaving him.

All these options are not attractive and are unsuitable for both the banks and the borrowers. The borrower will have to suffer a bad credit report, and the banks would face a huge financial loss. Thus, having a loan modified, is the best option, and is generally not very expensive, while being profitable to the banks as well.

Procedure

If you want to get your loan modified, you need to inquire from your bank. Let the bank know about your financial conditions and the reason for not being able to make the payments. The debtor qualifies when the bank agrees for modifying the loan.

Home Loans Made Easy By the HAMP Modification Program

HAMP Modification Program
HAMP Modification Program

The home affordable modification programs are the federal programs of the United States, which are set up in order to help eligible house owners with the loan modifications of the home loan debt.

This program supports the struggling homeowners who are at risk of foreclosure. They work with the lenders to reduce the monthly loan payments. The home affordable modification program has created some standard mortgage modification guidelines for the lenders to consider while evaluating any borrower for a potential mortgage modification.

What Is the Purpose of the Program?

The major purpose of this program is to give the Treasury Department all the authority that is necessary to restore the stability of the financial system of the United States.

This includes protecting the home values, life savings, college funds, and retirement accounts. It also includes preserving the homeownership and promoting jobs as well as taking care of the interests of the taxpayers.

Under this program, the lenders are given the opportunity to modify mortgage loans of homeowners and receive incentives in return.

To achieve this, the department of the U.S. Treasury has taken certain steps, like describing the program and other related programs on its website. It also guides you on how loan services are supposed to perform for the program modifications.

Requirements of the US Treasury Department

The loan providers are required to calculate a specific net present value, which is developed specifically for this program. The net present value of this program attempts to find out whether the investor will make sufficient money by modifying loans.

If the lender makes more money than the borrower does by entering this modification program, the investor will offer modification and will not make any efforts to foreclose. On the contrary, if the lender loses more money with the borrower, then he may proceed with the foreclosure.

Thus, under this program, the US economy gains more stability, as the lenders are required to determine carefully, whether foreclosure will be beneficial financially for the investor before it is actively pursued.

Who Is Eligible?

The eligibility and verification requirements of the program include the complete documented income of the borrower, including the proof of income. He must sign the documents of financial hardship as well.

The occupancy status of the property owner is verified by the borrower’s credit report as well as some other documents. Higher limits are allowed for owner-occupied homes with 2-4 units.

Tips to Remember When Doing a Loan Modification

Run the numbers first

Know what would be a good scenario for you. Figure out what kind of budget reductions you can make first and then determine what kind of payment you need to make it work. Come up with one or two ways to get there.

You can do this on your own – don’t fall for the scams.

Signing up for help from an attorney or a modification specialist will likely only frustrate you, and never never never give anyone who promises to evaluate your situation money to do so. The business model for modification specialists is almost all evaluation fees and almost never includes them getting paid for an actual modification.

Have a savvy friend or a loan officer you trust to review your paperwork.

Pay them to do it. $100 spent to know that the offer is a good deal for you is worth the money. I do this for folks along with reviewing their paperwork before they send in their documents up front.

It’s a fair exchange to make sure that you are putting your best foot forward (which again is a strike zone and not your shiniest moment). You will have a lot of emotions wrapped up in this, make sure you have others whom you trust looking over your shoulder.

Have an attorney review your paperwork.

I have done this personally with business and lending contracts, and even though paying $200 or so to an attorney never feels good when you’re writing the check, it is always a good idea.

An attorney may not be able to tell you if the modification is a good deal, but just as importantly, he or she can tell you if the bank is telling truth and if this paperwork will stick. Contracts paperwork as good as the two guys who are shaking hands. In these times, we rarely get to shake hands.

Also, if you succeed and receive paperwork that will modify your loan, make sure you keep a copy of it – forever. It will be your only proof that your loan terms were changed. Sometimes three little pages are all that you have to prove that the big packet you received way back when you purchased the home has been altered. These documents go in the safe or the safety deposit box.

Do more than give this a ”try”.

If you think that you might become one who will lose their home because you cannot afford it. Request a modification and stick with it. Don’t give up too soon. Although everyone loses when a home goes into foreclosure, no one loses more than you do.

What if you don’t succeed at modifying? Oftentimes lenders will not approve applicants for a loan modification. This is frustrating, especially if you have just given blood sweat and tears to get to the end of the process – only to be told NO. Two things should come to mind here.

First, my experience is that 99 times out of 100 when a modification is denied it’s because you don’t really need it. I don’t mean to offend anyone, but if you get denied, then you are likely able to make the payments, as uncomfortable as it may be to do so.

Second, remember that you borrowed the money. The bank didn’t make you do it. Neither did the slick Loan Officer. You did it. Who better to pay off the loan than the borrower?

Personal Story on Loan Modification

It’s no secret to many of my good friends and clients that the years 2000 through 2006 were very good years for me as a mortgage broker. I was not one who wrote the high-interest-rate sub-prime loans, but even so, many were buying and selling and refinancing in Michigan during those years, and I was able to help many of them.

Two things resulted from this for me. First, I became accustomed to a standard of living that was more than what I was previously used to. Second, I acquired a lot of personal and investment real estate during that time.

When the market began to turn in 2007 and the fell almost flat in 2008 my situation grew increasingly difficult. I had six mortgages on five different pieces of property and everything started to fall behind. In addition to that, thinking that this would not last long and that I was only borrowing temporarily, I accumulated some personal debt late in 2007.

By the middle of 2008, my businesses were running well again with fewer employees and greatly reduced expenses, but I was behind on almost every debt I had – some by more than 6 months.

Fast forward 30 months to today. Today I have been making all of my monthly payments on time and have reduced my total debt load by almost 20% since the worst period late in 2008. Four of the six mortgages have been modified, and the others were patient with me as I fought to catch up. I have not lost property at this point and will be able to eliminate all of the debt in the next 15 years so long as things keep going as they are this year in our “new normal”—if there is such a thing.

This is what I did to get through:

  1. I prayed a lot. I know that the mistakes I made while I was making more money put me in a position that left me deserving far worse than I have had to experience. Yet the mistakes I made were years ago. I’m simply living with the results of them now. I prayed for the strength to follow through on my obligations.
  2. I recognized that at any moment, one of these lenders might just give up on me. That could happen. I would have been deserving of it. It is good to get that out and realize that all of the hard work might come to nothing in the end. It was also good to communicate that with my wife and with a few close friends (and now all of your icon wink Personal Story on Loan Modification )
  3. We reduced our lifestyle severely. This one took buy-in from the whole team. I have seven kids, and my wife is now pregnant with our eighth, and they have all made changes to help make this work. If you ask any one of them today how we got through, they would all tell you the truth – God did it. We only helped a little.
  4. I worked very hard. I opened a new business in 2008. I worked from very early until late to find more people who could benefit from my services.
  5. I almost drained my retirement account. Over $100,000 of my retirement money went to keeping things going these past few years. Time for rebuilding is coming; today is the time for follow through.
  6. I called all of the lenders regularly. I promised them a call once per month and likely made two. I always asked them to mark my record as having called. I always communicated two things to the lenders, over and over—that I would call them every month with an update and that I would work as long as it took (even if that meant the next 30 years) to pay off the entire loan.
  7. I asked them for patients and their trust. As long as I had the money to pay this month’s payment, I would pay it and then work for the next month’s payments. I could not promise too far into the future, but I did promise that I was not going to give up if they wouldn’t.

Every time I hear a story similar to mine—and there have been lots of them—I’m encouraged to stay with it. I hope that my story does the same for you.

We are not completely out of the woods yet, but I am becoming convinced that this will turn out well. I pray that we will be able to reach our goal of paying back all of the money we borrowed.

I hope this series gives you the knowledge and the confidence to do what, by God’s grace, we have been able to do so far.

Keep fighting, never give up, and as I have said in the past: “Make them pry those keys out of your cold, dead fingers!”

Warren Paine

Warren is the senior mortgage loan officer who has worked in mortgages and loan industry since 1995. He study in Harvard and major in Finance with a Bsc. Honor Degree. He possesses a Paralegal Certificate as well.

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