Many Americans are frustrated and annoyed after trying to deal with their lenders to get a loan modification on their personal mortgage. Whatever the reason for their predicament with their mortgage being upside down, they are facing a foreclosure by their lender if the mortgage isn't refinanced or a principal reduction isn't granted. What are the key ingredients that every homeowner should know about a loan modification?
A loan modification is in the simplest terms a refinancing of an existing mortgage. If there is more than one mortgage in place on the property, there will have to be two modifications depending on whether the property has equity in it after the second or junior mortgage is modified.
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For example, if a home has two mortgages of $80,000 and $20,000 and the property is worth $90,000 if sold in today's market, the first mortgage holder will be reluctant to do a modification and the second mortgage holder will likewise not be all that interested in doing a loan modification unless the homeowner has a hardship that will cause him to lose the property to foreclosure. A foreclosure would wipe-out the second mortgage and cause a total loss to that lender.
If the market value of the above property was instead $50,000, the first or senior mortgage holder would be at risk for a substantial loss of his original loan and the junior note holder would be losing his entire loan amount if the property goes to foreclosure. Unfortunately for the junior note holder, the senior note holder is not concerned about the second getting any money back - unless both notes are from the same lender.
To add insult to injury, historically, lenders don't want to start loan modification discussions unless the homeowner is late on his mortgage payments. This is changing and approaching a lender about a modification well before there is a financial crisis is highly recommended. Some states at the epicenter of foreclosures have passed legislation to require lenders to come to a negotiation before they can file a foreclosure action. However, the net results have not been any different for homeowners as lenders continue to be reluctant to give substantial loan relief.
Homeowners should call their lenders and request a Loan Modification Kit. This kit will contain the documents necessary to process the modification request. Whether the homeowner or someone acting on the homeowner's behalf does the negotiation of the modification, the lender's required package is the same. This is one reason advocate groups have encouraged homeowners to do the work themselves and save thousands of dollars in fees to attorneys or individuals selling this service.
The essential parts of the package that the lender wants to see are the Hardship Letter and the homeowner's Financial Statement. The lenders don't really care about the homeowner's hardship, but require it and may seem sympathetic but in the final analysis, they want to get as much as possible of their loan amount back.
The Financial Statement is a different matter as this shows where the assets are, if there are any, that the homeowner still owns. These include other real estate, cash in the bank, stocks and bonds and virtually anything the lender can sell to later collect a judgment amount or have the homeowner liquidate to bring to the closing for a loan modification. Keep this in mind if you are filling out a Financial Statement for a loan modification, and since it is for a loan, falsifying this information is a very serious legal issue.
In speaking with loan modification firms who are doing thousands of negotiations for homeowners, less that of 1% that actually get principal reductions. Most of these are with smaller regional lenders. Because of this a homeowner should expect to be offered terms that reduce his monthly payments for a period of time because of an interest rate reduction, or a combination of an interest rate reduction and an extension of the mortgage to 40 years. In either case, the homeowner will get temporary relief but will ultimately pay more than his original mortgage amount.
Because this temporary payment relief quick fix to a long-term problem, many homeowners move toward a strategic default after a few months or years of their modifications. A strategic default is where the homeowner decides he has had enough and will never get into a right side up position on his mortgage versus market value and he simply stops paying his mortgage and goes into foreclosure. He may mount a foreclosure defense or just walk away. If you think about doing this because it is financially the best solution to your mortgage problem, seek legal advice before doing it to preserve your legal rights.
As a guideline of what the modified loan payment should be just take the family's combined gross income at the current time and multiply it by 30%. So, if the monthly gross income for a couple is $4,000, the expected loan modification payment should be in the area of $1,200 a month. Usually, the lender will change the interest rate on the mortgage to 2% or less to accommodate this payment, but will charge more as each year passes and ultimately recover their "loss" the longer the homeowner stays in his home.
In summary, many city, county or state programs are available for homeowners at no cost to do their loan modifications. These programs should be thoroughly investigated before making the choice to pay for expensive services that may achieve the same end. The homeowner has to be proactive in this process or the lender will move to foreclose on his home. Homeowners should analyze all the options including a strategic default, but do it as quickly as possible and remember this decision must be made or a lender will made the decisions for you that are not in your best interest.
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