Are you facing ballooning mortgage payments due to an adjustable interest rate that has just changed? Did you not completely understand the type of loan you were getting when you got it, and now you might be in danger of losing your home? You may want to contact your mortgage lender and work towards a loan modification. A loan modification is when you negotiate changes to your original loan agreement. Such a modification may mean a change in your interest rate, in the length of your loan (loan term), or in how much you must pay each month towards your mortgage. To file for such a modification, you may want to familiarize yourself with several of the modification terms.
Learning About Loan Modification Terms
Here are some key loan modification terms you should be aware of:
- “Deed-in-Lieu”: If you are in danger of foreclosure, you may be able to have your mortgage lender agree to you deeding the house back to them, instead of foreclosing on the property.
- “Short sale”: Rather than foreclose on a home, the bank agrees to sell it for less than the balance on the mortgage, and the lender keeps all of the proceeds of the short sale.
- “Fair Market Value”: What could your house feasibly be sold for in your neighborhood, and given current market conditions? This is the fair market value of your home, and it is what a bank will be willing to sell your house for in a short sale situation. The fair market value is typically determined after an appraisal of your property has been conducted.
- “Debt-to-Income Ratio”: The debt-to-income ratio is the amount you pay towards all of your debts in relation to your overall income. Having too high of a debt-to-income ratio may make it harder for your to qualify for certain loan modifications, because you are more likely to default on your loan since you must pay back too much overall debt.
- “Foreclosure”: Foreclosure is when the bank sells your home and the proceeds of that sale go to pay off your mortgage. In this case, you lose your home.
- “Principal Balance Reduction”: Some lenders will agree to reduce the principal, or primary loan amount that you owe. This is not a popular option from their perspective, because it reduces the amount of money they will collect in interest as well over time, but they may agree to it in certain instances.
- “Forbearance”: Your mortgage lender could possibly agree to your paying a lower amount every month, or even discontinue your mortgage payments for an agreed period of time, just until you clear up some of your financial problems. Lenders are more willing to do this than you might think!
Getting Help
If you are faced with legal language you do not understand, consult with an experienced and qualified attorney. Your attorney can provide you with definitions of any loan modification terms you don't understand and can review any documents before you sign them.
