Loan Modification

A loan modification is a permanent change to the mortgage note that restructures the terms of the loan in order to reinstate the loan and results in a payment the borrower can afford to make. Examples of a loan modification would include lowering the interest rate, extending the due date on the loan, or re-amortizing the remaining balance of the loan. This option is used for home owners that have suffered a loss of income and do not have the means to continue to make the normal monthly mortgage payments or back payments but do have the means to support a lower payment.
In order to modify the mortgage, the borrower must:

- Be two or more months behind in payments or able to prove that they will default shortly
- Have had the mortgage for at least 12 months
- Not be in foreclosure
- Prove a loss of income or increase in living expenses
- Live in the property as an owner occupant and continue to live in the home as a primary residence

Furthermore, the loan modification must result in a fixed rate loan that reinstates the loan. At the lender’s discretion, the interest rate may be set below market or increase the rate if the borrower has the ability to support the payment. The lender is also allowed to include any or all of the back payments owed into the principal amount. Any foreclosure costs, late fees, and other administrative expenses may not be included into the modified loan.

How to negotiate with your mortgage lender

All across America, home owners face the risk of losing their homes as a result of foreclosure. In Arizona, the same crisis confronts people who are behind in their mortgage payments or who are counting the days until the foreclosure sale.

Whenever a homeowner faces the threat of foreclosure, it is important to take a step back and analyze his or her situation from the perspective of the lender.

Though the home owner’s primary objective may be to save his or her house, the lender’s primary objective is to minimize the loss as much as possible to the company. In addition, if a home owner is to save his or her house from foreclosure, the home owner must analyze the situation from the perspective of the lender by 1) analyzing and determining the severity of the situation that caused the delinquency or default, 2) analyze his or her financial situation for the possibility of curing the default, and 3) identifying the best possible solution or alternative that the lender is willing to accept.

The policy of foreclosure prevention and minimizing a loss to the company is referred to as loss mitigation. Loss mitigation is a lender’s corporate policy or procedures designed to find solutions and alternatives for the lender and home owner while keeping the best interests of the lender in mind.

It is the goal of any entity’s loss mitigation policy to insure that losses and expenses are minimized and are generally in the best interest of the company, even if the home owner loses the home. The Federal Housing Administration (FHA), for example states in Mortgagee Letter 00-05 that the purpose of its loss mitigation policy is to “fulfill the goal of helping borrowers in default retain home ownership while reducing, or mitigating the economic impact on the insurance fund.” The Department of Veterans Affairs (VA) states in VA Handbook H26-94-1, section 4.03 that “VA encourages holders to extend every reasonable indulgence to worthy borrowers who are in temporary difficulty. However, when it is evident that the default is insoluble, every effort should be made to see that the security [house] is liquidated promptly to minimize the loss to the Government.” In all cases of loss mitigation policy, the lender will always try to find solutions that is the most financially sound for the corporation.

This does not state that the lender wishes to foreclose on every property that becomes delinquent or in default. Lenders are not in the business of foreclosing on homes; rather, a mortgage company will analyze the home owner’s situation and if it is possible for the borrower to continue making payments (which is composes of both the principal owed against the home and the interest payments to the mortgage company), the lender will find a solution to help the home owner continue making principal and interest payments.

Foreclosure can be a costly and time consuming process for a lender. However once a lender has started foreclosure proceedings, it is often difficult for a home owner to reverse or delay the mortgage company. The home owner should act quickly to prevent foreclosure proceedings from starting.

If a home owner faces the possibility of foreclosure, the lender will try to contact the borrower as soon as possible in order to identify the reason for the default and demand payment for the delinquency. Most lenders will categorize the borrower’s reason for the default into two categories: 1) hardships created by choice such as the purchase of a new, larger home and 2) hardships that are beyond the borrower’s control, such as the loss of income due to unemployment or illness. Furthermore, the lender will try to determine the duration of the hardship. A lender will ask, “Is it a temporary set back where the borrower will be able to reinstate the loan or is it a permanent situation that will affect the borrower for the remaining term of the loan?” The answer to these questions will control the decision and alternatives offered to the home owner.

Once the reason for the default has been identified, most lenders will require financial data from the borrower. This may include personal asset statements, current income statements, paystubs from the employer, credit checks, and other information that will be used to determine the borrower’s current financial status.

The lender will try to determine if the home owner has the ability to pay the monthly mortgage payment and keep the account current. The lender will verify checking and savings account to determine if any cash can be applied to the total amount owed.

Stated in most loss mitigation policies, the preferred alternative for permanent hardships is a solution that separates the borrower from the property. On the other hand, lenders recognize that borrowers facing temporary situations are generally able to get back on track through short term repayment options.

The following sections outlines options, alternatives, and solutions for specific types of loans. The key to negotiating with your lender is knowing what the lender expects and the course of action it will employ when faced with a borrower’s loan in default.

If you are thinking of a loan modification, short sale, or foreclosure please call my office so that we can advice you of the process which with the best of intentions, skill sets and efforts is very lengthy, convoluted and stressful to say the least.

If you would like all the forms and legal arguments necessary to help you with a loan modification, or like to hire a company Mortgage Modification Experts please follow the link below to purchase all the documents you will need or click on the link to contact us to help you.

Purchase our Arizona Loan Modification Packet

You get the following with our Loan Modification Kit: