LOAN MODIFICATION GUIDE
Definition of a Loan Modification
The technical definition of a loan modification is "a process where the terms of a mortgage are modified outside the original terms of the contract agreed to by the lender and borrower". There are four principal ways that a loan can be modified.
- A principal reduction.
- An interest rate reduction.
- An elongation of the loan term.
- A Forebearance.
WHAT TERMS OF A LOAN CAN THE BANK MODIFY
First, the lender needs your notarized written permission to change any terms of your loan.
Interest Rate Reduction Example I
One way to modify a loan is to lower the Interest Rate. When the interest rate goes down, so does the monthly payment. A homeowner has a mortgage loan for $200,000 at an interest rate of 7.00% amortized over 30 years.
The monthly payment at 7.0% is $1,330.60. The lender agrees to lower the interest rate to 5.0% The monthly payment at 5.0% is $1073.00. Savings is $257.60.
In addition, the sum of the total payments over the life of the loan decreases from $479,016 to $386,510 (that’s $92,506.00).
Amortization Term Increase Example II
The typical mortgage term is 30 years. The loan is “amortized” or paid back with principle and interest over a 30 year period. In order to make the loan more affordable, the lender may offer to extend the term of the loan to 40 years. Here is the effect on a $200,000 loan at 7.0% for 30 years:
30 Year Term Loan. Monthly Payment is $1330.60 ($480,000 over life of loan)
Now, extend the Term of the loan:
40 Year Term Loan. Monthly Payment is $1242 (596,000 over life of loan). Savings is $102.86
Notice that the savings is small but the total payments over the term of the loan increases dramatically with an Amortization Term Increase. (an advantage to the lender) This may be the least attractive option to the borrower.
Principle Balance Reduction Example III
Of all mortgage loan modification options, the Principle Balance Reduction is the most attractive to the borrower. The lender is actually reducing the balance due on the loan. For example, if the original loan was for $200,000, the lender may be willing to reduce the balance down to $150,000 in a severely depressed real estate market. Once accomplished, the lender is required to report this loss to the shareholders, and as a result, Principle Balance Reduction is the least favorite modification to the lender. What is the possible tax consequence to the bank recording a forgiven debt?
The Principle Balance Reduction has the effect of reducing the monthly payment and the total payments over the life of the loan. Example:
Original loan amount $200,000 Principle Reduction $50,000 New Balance $150,000 Interest Rate- 7.0% Term 30 Years
Monthly Payment on $200,000: $1330.60 Monthly Payment on $150,000: $997.95
Not only does this reduce your monthly payment, the Principle Balance Reduction greatly reduces your total payments over the life of the loan.
Savings is $ 332.65/month OR $120,736.35 over the life of the loan
FREQUENTLY ASKED QUESTIONS: (FAQ)
What Does Mortgage Forbearance Agreement Mean?
In a mortgage forbearance agreement monthly payments are temporarily reduced or suspended. Usually the homeowner must begin paying at least the full amount of the monthly mortgage payment due under the mortgage at the end of the period of reduced or suspended payments, plus extra to pay down the accumulated arrears. This means you should have an expected end to your financial hardship if you are requesting this workout option. It is not uncommon for escrow arrearage and foreclosure fees/costs to be double counted in the calculation of repayment – So be sure to analyze the figures.
How long does it take to complete a home loan modification?
Most banks claim the process takes 30-90 to process in the lenders loss mitigation department. Prior to arrival in the loss mitigation department, typically, information can take up to 3 weeks to “upload” into lender’s database. Additionally, individual items such as:
- Completeness and organization of documents provided by the homeowner;
- Individual complications (unusual financial hardship, RESPA/TILA violations, builder defects…)
- Quantity of loan modifications the servicer/lender/insurer is presently working on;
Can all affect to the complexity and time require, not to mention the bank’s desire to finalize a loan modification. This is one of the finer details that may lead someone to retain one of the licensed Loan Modification Companies. We have developed a Loan Modification Software to organize the application process.
How Do I Qualify?
The requirements for qualifying for a loan modification program are typically set by the largest purchaser of mortgages on the secondary market. Being the largest player with the most to gain/lose they set the standard for other smaller servicers and lenders. In recent history Fannie Mae has been the largest purchaser and details their guidelines in the Fannie Mae Single-Family Servicing Guide. The updated servicing guide is updated and available at:
The fundamental requirements for qualification are: a willingness to enter into/facilitate a work-out agreement/loan modification; display a financial hardship; and have the financials to support the agreement. We have posted our Loan Modification Vital Documents as well as our Loan Modification Binder to help homeowners picture what is involved.
What If I'm Already In Foreclosure
“In Foreclosure” is a relatively loose (though intimidating) expression. In most cases, homeowners are in the Foreclosure process when a “notice of default” is filed. Frequently more work-out options are available prior to the lender/servicer incurring costs related to a foreclosure. The primary motivation of the bank in entering into a work-out is the intention to save money. The more money the bank spends on the foreclosure process the less beneficial a work-out will be from their perspective. Conversely, the early stages of the foreclosure process typically leave enough time available to achieve a beneficial result.
What If I Have Bad Credit?
“Bad Credit” typically refers to a score. As you go higher up the chain of a bank – to the type of authority that can perform a cost benefit analysis for loan mods or evaluate the terms for loan modification programs we agree with some that say the credit score is not a primary concern. This is because credit “scores” are not as informative as the criteria that make them up. Credit “Scores” are calculated by, what are commonly referred to as, “Credit Scorecards”. Controversially, any data (with few exceptions) available to the lender/servicer can be included on these “Scorecards” for the purpose of evaluating risk. Due to the time and expense spent on this technology, to name a few, we believe it is illogical and irresponsible on the part of the lender/servicer if they do not evaluate this information. Credit Score indicates risk and risk is a component of the Net Present Value calculation that banks are expected to use in evaluating a loan modification. Las Vegas Loan Modification is comprised of service providers that are required to display their Loan Modification License.
Are Lender Loss Mitigation Representatives hard to talk too?
First, you need to find a loss mitigation representative. Typically when you call a servicer you are speaking to someone more along the lines of a debt collector. From the Lender’s point of view, Loan Modification is really the process of stopping or minimizing loss. In the event you call the servicer and feel as though your not receiving information for a work-out but instead “when will you make this account current” you are most likely not speaking to someone from “Loss Mitigation” and may consider contacting the lender who may be more interested in helping. Most loss mitigation representatives are easy to speak with if you know how to do it. They deal with people all day that may not be providing information accurately/correctly/or timely so we recommend finding out what they want and how they want it – And Do It – EXACTLY.
Why do loan officers or loss mitigation specialists get paid so much for there services?
Hopefully you are paying for a previous investment they made in education (time/effort/money); previous work experience (time, effort, money); and the risks/rewards associated with their job.
What is Loan Modification?
A loan modification is a written agreement between the servicer and the homeowner that permanently changes one or more of the original terms of the note in order to help the homeowner bring a defaulted loan current and prevent foreclosure OR a process where the terms of a mortgage are modified outside original terms of the contract agreed to by the lender and borrower. See our video series – Get Modified Episode 1
Do I have to be behind on payments to qualify for a Loan Modification?
While most loan modifications are done for those who are behind on mortgage payments and can show a substantiated reason for why they cannot catch up, you don’t have to be behind to qualify for a mortgage modification.
Can missed payments be included in a Loan Modification?
Past mortgage payments that went unpaid can be included into a loan modification. A willingness to get caught up in your current mortgage can show the lender how serious you are about making any new mortgage terms a top priority.
What constitutes a “Hardship Situation”?
A “Financial Hardship” is fundamentally described as an unexpected increase in expenses or unwilling decrease in income. Many things can cause this. Financial hardship is commonly caused by death of a family member, divorce, injury, illness, or loss of employment….
Can a Loan Modification help me avoid foreclosure?
Absolutely, that is the primary purpose. You should consider a mortgage modification before entering the foreclosure process. As lenders and banks continue to help homeowners avoid this costly situation mortgage modifications have become more and more attractive.
Can late payments be included in a Loan Modification?
According to the HAM Program, No. Late fees on overdue payments cannot be included in a mortgage modification plan. There are other programs that allow for this. The most important point we can make on this is be clear on every detail of your agreement and take nothing for granted.
How long do I have to start a Loan Modification?
We recommend a change in your thought process. If you are aware there is a problem with your mortgage (A First Tier Financial Responsibility) waiting while attending to lower priority items may indicate to the servicer/lender you are less of a candidate for loan modification and leave you few options other than (1) Paying your mortgage (2)Foreclosure (3)Bankruptcy
Will the bank require an interior inspection of my home?
Not likely. An interior inspection of your home could be necessary as a means to determine whether a loan modification is a viable option. This inspection is meant to determine the value of the home.