What Is A Loan Modification

Posted on September 19, 2011 by admin

When you are facing bankruptcy and have a huge mortgage loan on your home that needs to be paid, foreclosure often appears to be the only option for you to take. In fact, a number of Americans choose to foreclose their properties without even giving consideration to other options such as loan modification, losing out quite substantially in the process. If you are in financial difficulties and are considering foreclosure, it is very important for you to learn more about loan modification as the better solution to your problems.

Loan Modification Defined

Loan modification refers to the process wherein the terms of your mortgage loan are changed so that they are more in tune with your present ability to repay. All of the changes brought about in your loan terms are agreed to by you, the borrower and your lender. Usually, any kind of loan can be modified provided the borrower and lender reach a consensus.

In recent times, as home values continue to stay subdued and new home owners are finding it increasingly difficult to recoup their investment either from rentals or sales, many of them are resorting to loan modification. By ensuring that the loan is modified so that the repayment is more manageable, borrowers can eliminate the inevitability of foreclosure.

How to Modify your Loan

There are many ways in which your mortgage loan can be modified with the agreement of your lender. Here are a few possibilities you can consider when you decide on loan modification:

  • Switch from floating rate to fixed rate or vice versa.

  • Reduce the interest rate.

  • Change the manner in which floating rate is calculated.

  • Increase the term of repayment and reduce size of installments.

  • Reduce the principal.

  • Establish limits on installments so that they remain within a specific percentage of your monthly income.

    • Continue reading →

    Posted in Loan Modifications | Tagged | Comments Off

    Loan Modification Programs from the Government

    Posted on September 19, 2011 by admin

    To shore up the housing market, the Obama administration came up with some special programs that were aimed at helping beleaguered mortgage loan borrowers avoid foreclosure. These programs were introduced in the early months of 2009 to assist the millions of new home owners who found themselves unable to meet mortgage loan obligations. These loan modification programs are part of the Homeowner Affordability and Stability Plan (HASP) with a budget allocation of $75 billion being set aside for such initiatives.

    Salient Features of the Loan Modification Programs  

    The primary objective of these programs is to reduce the financial burden on the borrower so that he can repay the loan in full, albeit with modified terms. This helps him keep his home as well as retain his credit rating so that his financial status remains unharmed. Some of the salient features of these loan modification programs are:

    The Thirty Eight Percent Rule

    According to the stipulations of these loan modification programs, participating loan services have to agree to certain conditions. The monthly payment required from the borrower should be reduced so that it is no higher than 38% of his/ her monthly income. With some assistance from the government, the payments are further brought down so that they are within 31% of the borrower’s gross monthly income.

    Reducing Interest Rate to 2%

    The loan servicing participants will have to bring down interest rate to as low as 2% if required, to meet the stipulations of keeping the monthly repayment amount within 38% of monthly gross income. If even this interest rate reduction does not make the loan affordable for the borrower, the term of the loan should be extended to up to 40 years.

    Principal Forbearance

    If even extending the loan term to 40 years and bringing the interest rate down to 2% does not bring the loan repayment within affordable levels for the borrower, the loan servicer should forbear the loan principal with zero interest. Borrowers should note that these loan modification programs do not make it mandatory for the servicer to reduce mortgage principal.
    Continue reading →

    Posted in Loan Modifications | Tagged | Comments Off

    Qualifying for Home Loan Modification

    Posted on September 19, 2011 by admin

    If you are over burdened by a huge mortgage loan on your home and you simply do not have the financial means to sustain repayments, home loan modification may well be the only solution for your troubles. But not many hard pressed borrowers know that home loan modification is not for everyone. Some factors are taken into consideration by your lender to determine whether you are eligible to apply for modification of your home loan. Learn more about these factors so that you can be fully prepared before making your loan modification application.

    Are you living in the Mortgaged House?

    The very first question that your lender will want answered is whether you are actually living in the home that is mortgaged with him. No lender will agree to a home loan modification for a property that is not your primary place of residence. The premise behind this is that if you can afford to have property in addition to your place of stay you are not in dire financial straits. This means that you can afford to repay your mortgage under existing terms. That is why if you have purchased property for investment purpose using a mortgage loan you cannot apply for home loan modification for that debt.

    Proven Hardship

    To show that you are unable to sustain your mortgage repayments you will need to prove that you are experiencing hardship of some kind that affects your ability to pay. This hardship may take the form of medical expenses, loss of employment etc. Different people may have different kinds of hardship that prevents them from fulfilling their mortgage obligations. What is important is for you to be able to make a convincing case for your lender showing how your hardship is affecting your finances. For example, assume that your hardship is that your savings have been wiped out because you had to meet a large medical expense. You will need to show proof that you incurred a substantial expense that was not met by your insurance for some reason.
    Continue reading →

    Posted in Loan Modifications | Tagged | Comments Off

    Why is DTI Important for Mortgage Loan Modification

    Posted on September 19, 2011 by admin

    Millions of Americans have benefited by opting for mortgage loan modification when their financial condition has deteriorated to an extent that makes repayment under existing loan terms an impossible task. By choosing to modify the mortgage loan, these people have saved their most important asset – their home.

    In addition, they have ensured that their credit score remains unaffected by loan default or late payments. But before you apply for a mortgage loan modification, it is important for you to understand the many factors that affect your chances of getting approval for the process. One of the critical factors that lenders consider for approval of loan modification is the DTI or Debt to Income ratio.

    What is DTI?

    The Debt to Income ratio or DTI tells the lender how your debt compares in relation to your income on a monthly basis. This ratio is used by lenders to assess how short your current finances fall in covering the debts you currently have. The ratio is calculated by dividing the monthly debt payments by your gross monthly income. For the purpose of this calculation, debt payments include car loan installments, house payments, credit card payments etc. Your other recurring expenses like groceries, clothing, utilities, heating, gas etc are not taken into consideration as part of your monthly ‘debt’.

    Some lenders may adopt a more conservative practice to calculating your DTI. Under this method, the lender uses your net monthly income rather than gross income to determine your repayment ability. The logic behind this method is that only your net take- home pay is actually available for you to spend and not your gross income. If your mortgage loan modification has been rejected it may be because your lender has considered your net pay rather than your gross pay for the purpose of the DTI calculation. Since the net pay is bound to be lesser than the gross income, many more borrowers will face disqualification if this conservative approach is adopted by all lenders.

    What is defined as Income?

    According to the government’s HAMP rules, there are many earnings that are taken into account as income for the purpose of mortgage loan modification. The following are included in this list:
    Continue reading →

    Posted in Loan Modifications | Tagged | Leave a comment