Loan Modification

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What is a loan modification?

A loan modification is simply a new agreement with your existing lender that changes the terms of your existing mortgage.  The purpose of a loan modification is to lower your monthly mortgage payment to a payment you can afford right now and in the future.  Typical changes to your existing mortgage agreement can include:

  • Reduction in your interest rate
  • Change of an adjustable or interest only rate to a fixed rate
  • Elimination of penalties, including late fees
  • Extension of the loan term
  • Making a portion of the loan interest free

These changes will reduce the amount you will pay the bank each month and correspondingly the amount you pay to your lender over the life of the loan.

Payment Deferral & Halt of Foreclosure Proceedings

While lowering the monthly mortgage payment is the main goal of a loan modification, there are also a few highly desirable side effects of the modification application process.   The application process generally takes anywhere from 3-6 months (and sometimes longer) . In most cases you will not make your regular monthly mortgage payments during that process.

Also during the same application process time, lenders generally halt foreclosure proceedings, either voluntarily or because of actions by the homeowner forcing the lender to stop foreclosure.  Both of these benefits can be powerful aids to homeowners who have been stretched beyond their current means or who simply need some time to re-group, catch up on other living expenses, or in some cases find new work.

Different types of loan modifications

There are two general categories of loan modifications:  government and ‘traditional’.

Government:  HAMP loan modification

‘HAMP’ stands for Home Affordable Modification Program, which is part of the government’s Making Home Affordable (MHA) initiative, which in turn is part of the Economic Affordability and Stability Act of 2008.  If you qualify for a modification under the HAMP program, the federal government compensates the lender as an inducement for modifying the terms of your loan.  The decision whether or not to modify an existing mortgage agreement rests with the lender, but the decision of whether or not to review an application for a modification does not.  Lenders who accepted TARP funds from the federal government are obligated to review HAMP loan modification applications.  Through this program the government offers a cash incentive to mortgage lenders/servicers to modify your mortgage payment agreement.  The program also gives extra assistance to homeowners who accept modification and stay current on all payments with a loan principal reduction of $1,000 per year for the first 5 years after modification.

Link to MHA website

Link to HAMP program information

Traditional ‘in-house’ modification: investor guidelines

A traditional ‘in house’ modification is a private modification also negotiated with your lender/servicer, but according to the program guidelines of the entity who actually owns the debt owed on your home, the ‘investor’.  This type of modification option has always been available, but little used as before the collapse of real estate values, investors had little incentive to anything other than sell the home in a foreclosure sale to recoup the money lent on the mortgage.  With property prices at historic lows, investors are more willing to consider modifying the repayment agreement to make it affordable (that is, lower the payments) for the homeowner to remain in their home rather than foreclose and let it sit empty while they wait an indefinite number of years for real estate prices to recover.

Approximately 50% of all US mortgages are owned by Fannie Mae (FNMA) and Freddie Mac (FMCC) and so the bulk of traditional modifications are done according to their modification guidelines.

-Do’s and Don’ts-

Do hire professional help

There is an enormous amount of online information about loan modifications, some accurate and some not, it can be challenging and overwhelming to ‘see the forest for the trees’.  Determining the best strategy for you is very important to your application and is a strong reason to seek professional help.  Lenders are increasingly aware that loan modification is often the best solution for both sides, but their staff is often tremendously overburdened, and each employee is generally responsible for hundreds of applications.  Because of this, many applications are inevitably mishandled or ‘fall between the cracks’ and ultimately are rejected unnecessarily.  A successful application requires experience, attention and persistence.

In many cases your lender also wants to modify your loan

Lenders incur significant extra expense if they foreclose on your property.  They lose the monthly payments you have been making while incurring the expense of attorney and title fees in the foreclosure sale itself, rehabilitation of the property and then sales commission for selling it.  All of these costs occur against the background of falling property prices and your lender is well aware of all this and wants to resolve the issue as well.

Don’t wait too long

Do not wait to seek professional help.  Most of us have many different pieces to our financial picture and there are usually multiple strategies to consider.  Delay can limit the number of options available to you, so do not procrastinate!  At least one of the government defined modification program requires that you have been current on your monthly .  Do not stop paying your mortgages until you have sound, experienced legal advice.

Don’t assume it is too late to act

As long as you still have your home, you have opportunities to keep it and we will work with you to assess all possible strategies.

Don’t file for Bankruptcy straight away

Bankruptcy can be a legitimate strategy or part of a strategy, but always seek reliable legal advice before taking any drastic steps.  Bankruptcies stay on your credit report for ten years and have some severe side effects.  Yet in many cases a strategic bankruptcy is the best step in recovering homeowners’ financial stability.

This law firm qualifies as a Debt Relief Agency under Title 11 of the Unites States Code. We assist people with excessive debt, collection pressures, foreclosures, evictions, and credit defaults. In some cases that may involve filing for bankruptcy relief under the United States Bankruptcy Code.