It is official. The government is behind the movement to encourage banks to modify the mortgages of many Americans. The President’s foreclosure prevention plan sets out standards for these modifications as well as financial incentives for the banks to move forward. So you want to have your own loan modified? Who would not want a lower payment on their mortgage! Obtaining new loan terms is not necessarily easy.
First, what is a loan modification?
In simple terms, a loan modification is a change to the terms of your mortgage. A loan modification can result in a lower payment through an interest rate reduction, increasing the length of the loan, lowering of the principal balance or setting up payments for back-interest owed. A modification may include one or more of these elements.
Why would the bank modify my loan? The cost of modification is much less than the cost of foreclosure. If the bank forecloses, it will incur the costs of carrying the property, marketing and maintaining the home, and legal expenses. After foreclosure the bank still must sell the home at or below today’s market value which is likely to be lower.
Who is likely to get a modification?
There are two criteria that are essential in order to obtain a loan modification. First, the homeowner must have a hardship. This means that the homeowner must not be able to make the present payment. Evidence of a hardship would include being behind on the payment but the homeowner can be current and in danger of falling behind. Note that a hardship can occur because of a loss of income or the payment rising in the case of an increased rate with an adjustable rate mortgage. The fact that the home has gone down in value by itself is not considered a hardship.
The second criteria necessary to achieve modification would be for the homeowner to be able to make a lower payment. There is a balance here in which the higher payment is not affordable, but a lower payment would be affordable. That is why the bank will verify all debts and the income of the homeowner. Each bank has its own criteria but you should ask yourself if you would adjust the payment for someone who can’t make this new payment?
The keys to getting the deal done.
Navigating the waters of a bank modification department is very tricky. These are large organizations and they are inundated with requests because of the present housing crisis. The keys are to make sure you meet the criteria up-front.
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