The Truth About Loan Modifications

By Toni Ryan, First Priority Financial

Loan Modification is not a new process but it has many new meanings in today's economic market.  Achieving a Loan Modification may take the strength of Superman to achieve but once completed, can allow a family to keep their home.
    How is this accomplished? The lender changes or alters the terms of your current mortgage loan which restructures the payment. The original mortgage agreement can be changed in one or all of the following ways:
1.    Extending the repayment term of the loan to as long as 40 years
2.    Lowering the interest rate
3.    Changing/lowering the prinicple balance owed
4.    Forebearance where the lender will wait to a later date for the back payments owed
    The most common modifications have involved lowering the interest rate and extending the repayment time.  The Making Homes Affordable Plans (often referred to as HAMP) reduce the rate and or extend the repayment term to create a payment no more than 38% of the homeowners' current income.
    It is important to note that rarely does the lender reduce the principle of the loan but if they do, this reduction is only given in increments, usually after payments have been made on time for a specific term of the loan.  For example, if a $99,000 reduction was approved, the lender would lower the amount owed by $33,000 after payments were completed on time for the first 36 months, then another $33,000 after 72 months and the last $33,000 with on-time payments at the 10 year mark.
    Forebearance usually comes into the option when the homeowner is more than 60 days late in their payments.  Forebearance is a special agreement between the lender and the borrower to delay foreclosure, the term means “hold back”.  In the agreement, the lender delays his right to foreclose giving the borrower time to catch up on his scheduled payment.
    As an example, if a homeowner owed $400,000 on his home and he had not made his mortgage payments for the last 6 months due to lowered wages.  The lender may lower the interest rate and place the back payments in a forebearance account.  The payment created would fit within the 38% of his wages today and would include a portion to pay off the forebearance account. Often times, the interest rate may be fixed for 5 years and then raise by 1% for year 6 and become fixed at today's going rates in year 7 through the end of the term.
    The lenders do not want to take back the home, they just want the debt owed to be paid.  A loan modification is designed to create terms to enable the homeowner to repay the debt they originally committed to when they entered into the loan.  Check with your tax consultant as well as a mortgage specialist for all your options during this difficult time.