LOAN MODIFICATIONS TOUGH TO COME BY! Should This Be A Surprise to You?
STRICT LOAN MOD GUIDELINES PROVE MAJOR STUMBLING BLOCK FOR MANY SEEKING BETTER LOAN TERMS!
Your $400,000 house purchased two years ago, putting down 10% of the purchase price, now has a market price of only $370,000. The initial adjustable rate has reset higher, and your monthly payments leap up $150. Now, you're strapped, and that originally-affordable loan payment is tough to afford.
Further, you find it tough to re-finance your loan, as your accumulated home equity is very slim, and far short of lender guidelines for re-finance. Anything you can do?
Have your loan modified, you think?
Though that is a possibility, the lender may be hesitant to offer modified terms to you if you have kept up with your payments, and your employment or personal situation has not changed. Why, lenders might think, should they give you easier-to-afford terms if you're keeping up with your payments anyway?
Hence, an unfriendly application of the rules to those struggling to keep their payments current. To banks, borrowers who have missed several payments and are facing possible default apparently cannot afford to pay - and many of these borrowers are approved for loan modification programs. Those not delinquent, but feeling strapped financially, will likely not get relief if or until they fall into default. That's the way things have typically gone to this point.
To determine if a specific borrower would qualify for a modified mortgage loan, they look at their monthly house payment as a percentage of their total gross household income. It that house-payment-to-income ratio exceeds lender guidelines - typically, 31 to 41% for most lenders - a loan modification program is considered. However, if the ratio is lower and more favorable, the loan modification is more likely to be denied.
Of course, there are always mitigating circumstances. If the borrower has endured some sort of hardship - loss of a job, divorce, prolonged illness, physical disability, or the death of a spouse, the application for loan modification stands a better chance for approval. In these cases, most lenders require a written "hardship letter," explaining their specific situation.
To create a loan modification that is win-win for both parties, the bank aims to collect as much as possible of the original loan amount, while, at the same time, working out a payment schedule that the borrower is likely to keep current with.
Common loan modification programs may offer an extended period for principal payback (often as much as 40 years, rather than the original 30), a reduction in the interest rate, and a deferral of the principal payments due.
Very few loan modification programs offer actual principal reduction, or forgiveness of debt. For banks, giving back this actual equity is a very last resort - one often taken only in the more desperate situations of short sale or foreclosure.
Experts suggest contacting your lender to discuss a possible loan modification. Bear in mind that most lenders, however, are more concerned with your ability to keep current on modified loan terms - not why you can't afford the current terms. And a few might not even discuss your situation seriously with you while your loan is still current.
Approval time varies, depending on one's individual financial situation. Some seeking loan modification are approved immediately; others must wait longer.
In some cases, lenders send pre-approved modification offers to those who they consider "high risk," either by their history of late payments, the state or area in which they live, or their particular loan product - especially if the original loan was a risky sub-prime or limited or no-documentation product.
Still confused? The U.S. Department of Housing and Urban Development (HUD) certifies several non-profit mortgage counseling agencies. Check via their website, or call 800-569-4287 (the HUD Voice Response System) for more information.
For more info, read Marcie Geffner's syndicated story in the Chicago Sun-Times from last Sunday, December 21st.
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