What is Loan Modification?

Most lenders will consider loan modification where most, or all of the delinquent payments and foreclosure fees are added onto the back end of the loan. Payments often can remain approximately the same. In some cases the interest rate may be reduced permanently.

The objectives of both the lender, and the borrower in the loan modification process happen to be the same. The goal is to design a repayment schedule that ensures the borrower can afford to pay their mortgage payments while being able to maintain their lifestyle. This means being able to pay other necessary living expenses including; car payment(s), food and groceries, utilities, gasoline, insurance, child care, clothing, home maintenance, property taxes, etc.

Who Qualifies For a Loan Modification?

The need to alter a loan can be caused by many factors, such as:

• The borrower having less income than anticipated (i.e. reduction in salary or loss of job)
• A family or medical hardship (i.e. illness or death in the family)
• A scheduled change in loan structure that the borrower wasn’t aware of or didn’t anticipate (payment adjustment)
• A decrease in the value of the property
• And a variety of other factors

Lenders will consider many of these types of issues a “hardship”, and are generally open to altering the repayment terms of the mortgage loan (and on certain loans the principal balance), due to the borrower’s hardship.

Recapitalization Programs

To address the back payment issues of borrowers, many lenders have designed “recapitalization” programs where outstanding mortgage payments are added to the principal balance of the loan, and the borrower goes back to a “current” status on the loan.

Rate Reduction Programs

Nearly all lenders will also consider rate reduction programs which; can substantially reduce a borrower’s monthly payment amount. In order to lower the monthly mortgage payment, lenders frequently offer “rate reductions” which serve to reduce the amount the borrower pays monthly, by reducing the interest amount.

Especially during the early years of a mortgage reduction schedule, nearly the entire payment is going to pay interest. If the interest is lower, the payment can be reduced accordingly. Today many lenders also offer “temporary rate reduction” programs in which the interest rate is reduced (often well below the market rate) for a period of time to allow the borrower to “get back on track.”

The Truth About Loan Modifications

Many loan modification companies and even attorneys are advertising that they can reduce principal on residential mortgage loans. This type of advertising is misleading. While it certainly is possible to reduce principal on a 2nd or 3rd mortgage, first mortgages are generally not eligible for principal reductions.

On 1st mortgages, to offset the decline in value, lenders often will reduce a borrower’s interest rate to below market levels, but will rarely, if ever, reduce principal on 1st mortgages. There are no official lender programs to reduce principal on 1st mortgages. For 2nd and 3rd mortgages, voluntary principal reduction is often a possibility.

Forbearance Programs

A forbearance program is where the borrower pays at least 20% of their outstanding mortgage payments, plus foreclosure fees, in addition to their regular monthly mortgage payments. This causes the mortgage payment to actually increase during the term of the forbearance program. The balance of the delinquency will be added to their regular monthly payments over a short period of six to forty-eight months.

Alternatively, a lender may “offer” to allow the borrower to catch up all back payments at once in a lump sum payment to the lender. In either scenario, forbearance programs do not typically stop foreclosure proceedings, forbearance programs simply “postpone” the foreclosure sale date.

Call Us for Loan Modification Assistance

Anytime a borrower is facing foreclosure, or a situation where they are unable to make their scheduled mortgage payments, it is a serious problem. We understand not only the financial impact this type of situation can have on a family, but also the emotional toll it can take.