What is Loan Modification?

A loan modification is one means of avoiding a foreclosure. A loan modification occurs when a borrower changes the current loan terms of a pre-existing mortgage with a lender. A loan modification is a way to lower your payment without having to refinance. In order to qualify for a loan modification, the borrower must have a "hardship". Common "hardships" include job loss, illness, death in the family, military service, etc. Most lenders will require such things as a hardship letter explaining the reason for the default, bond statements, and proof of income.

The government has also announced a new loan modification program specifically tailored for Fanny May and Freddie Mac loans. The Home Affordable Modification program is expected to help up to 3 to 4 million at-risk homeowners avoid foreclosure by reducing monthly mortgage payments. The following are the new Streamlined Modification Program (SMP) devised to assist homeowners in stopping foreclosure:

• Loans originated on or before January 1, 2009.
• Only applicable to Freddie Mac or Fanny May loans (60-70% of current mortgage loans).
• First-line loans on owner-occupied properties with unpaid principal balance up to $729,750. Higher limits allowed for owner-occupied properties with 2-4 units.
• All borrowers must fully document income, including signed IRS 4506-T, two most recent pay stubs, and most recent tax return, and must sign an affidavit of financial hardship.
• Property owner occupancy status will be verified through borrower credit report and other documentation; no investor-owned, vacant, or condemned properties.
• No missed mortgage payments required, if the servicer determines that the borrower is at imminent risk of default.
• The program will include incentives for extinguishing second liens on loans modified under this program.

If the homeowner does not meet the above criteria, they may nevertheless qualify for a traditional loan modification.

A loan modification can take the form of an Interest Rate Modification. Modification of a homeowner's interest rate is a common type of loan modification. Some homeowners have Adjustable Rate Mortgages which increase substantially with time, resulting in the homeowner having to make mortgage payments beyond the homeowner's means. With an interest rate modification, the homeowner negotiates with the lender for a lower interest rate on the loan for a specified period of the loan or even throughout the duration of the loan, thereby reducing the monthly mortgage payments.

Another type of loan modification is the Loan Term Modification. A loan term modification is also quite common. It is simply a negotiation with the lender to lengthen the term of the mortgage loan, which again results in a reduction of the monthly payment amount. A caveat with loan term modifications is that some lenders might add payments that might be due in arrears and the interest on these still accrues on the outstanding balance of the loan.

Yet another type of loan modification is the so-called Principal Balance Reduction Modification. This modification reduces the principal amount of the mortgage loan. In general, this type of loan modification can be the most beneficial type of loan modification because it results in an immediate reduction in the monthly mortgage payments. This option may require careful research on the part of a loan modification specialist and careful negotiation between the borrower and the lender to determine whether it is really the most beneficial option. In certain lending cases, a combination of a principal reduction modification and an interest reduction modification can position the homeowner in a situation that is mutually beneficial to the lender and the homeowner, thus forestalling foreclosure.

Contact us today for a free consultation by a loan modification specialist to see if you qualify for a loan modification.

In most cases, borrowers will need a loan modification attorney to negotiate the deal. Here is where our team of attorneys at our firm are ready to assist and fight for you throughout the entire process. Our attorneys and underwriters will negotiate with your lender to lower your interest rate, lower your principle balance, or even extend the term of the loan.

A Short Sale

A short sale is an alternative means of avoiding foreclosure. A short sale occurs when the proceeds of a real estate sale fall short of the balance owed on the property. A bank short sale allows the borrower to sell the home, usually to a third-party investor, and pay the proceeds to the lender. The lender may accept it as full payment for the loan, even if the selling price falls short of the mortgage balance or the home's fair market value. In some cases, however, the lender can still file a deficiency suit against the borrower to recover the remaining balance.

Lenders usually allow a pre-foreclosure short sale if the discount is less than the expected costs of foreclosure. To get a better picture of this situation, most of them also require a hardship letter and standard financial documents.

The drawback to a mortgage short sale is that it does not keep the borrowers in their homes. Short sale foreclosures are usually meant to minimize credit damage when the only other alternative is foreclosure. While a short sale still adversely affects the borrower's credit, it is a less damaging form of foreclosure loss mitigation. Short sales are easier to clean upon the record and the borrower can usually take out another loan after one to three years.