7 Misconceptions of Loan Modifications

With the economical challenges Americans face today, the need for loan modifications is on the rise.  Many homeowners learn the hard way that adjustable rate mortgages are often devastating, when the rates go up drastically.  Sometimes, restructuring the loan is the only way to keep property and not have to start all over again.  However, the process is frequently complicated and confusing.  In an effort to make an informed decision about financial options, it is important to understand the 7 misconceptions of loan modifications.

Common Misconceptions of Loan Modification

1. Banks Must Help
2. Request for Loan Modification Stops Foreclosures
3. Only Debtor Income is Considered
4. Principle Also Changes
5. Only FannieMae or FreddieMac Loans Apply
6. Lender must Modify, if Debtor Qualifies
7. Late Payments are Necessary

1. Banks Must Help

Banks are in business to make money.  No lender is obligated to help a borrower modify a loan.  Unless it is in the best interests of the company, the individual is on his/her own.  However, foreclosing on a home is expensive business.  The process usually takes months and costs the lender somewhere in the neighborhood of $10,000. In many cases, the property becomes a white elephant.  The property is resold for a lot less than the principle stilled owed on the mortgage or loan.

So, if foreclosure is just around the corner, talking to the lender is usually in the best interests of both parties.  The bank does not want to watch a loan go bad; the lender really does not want repossession of the property.  If the borrower has employment and will afford the payments, if the loan is modified, the bank generally helps.  The bank will require financial proof that a modification will satisfy the principle amount deemed necessary to resolve the debt.  However, they are under no obligation to modify a loan.

2. Request for Loan Modification Stops Foreclosures

“Do not put off until tomorrow what you can do today.”  When it involves a request for loan modification, the timeless say is very true.  The bank or lender is required to give ample notification that foreclosure is imminent.  Borrowers should never wait for a windfall or circumstances to change.  Instead, use the time to be proactive, and do what is necessary to hopefully save the property.

First, contact a bankruptcy lawyer.  Learn what options are available. Based on income and expenses, is a loan modification feasible?  Is there any other way to retain the home?  Assistance for borrowers is available.  In addition to loan modification, a deed in lieu of foreclosure, a forbearance agreement, or short sale are preferable to foreclosure.

However, debtors seeking assistance are assigned a negotiator.  But, the process is slow, and may not be quick enough, if foreclosure is a week or two away.  Therefore, it is vital to contact a lawyer immediately upon receiving notification of foreclosure. Then, start the process for debt assistance.  Usually, the lender requires a negotiator before stalling any legal actions.  The application must go through the system before an individual is assigned to a case.  So, do not wait until the last minute.

3. Only Debtor Income is Considered

When apply for a loan modification, the total wages of the household is considered.  For instance, a house is in the name of one spouse.  However, the income of any other contributing adult is fair game, if requesting financial assistance.  In fact, anyone capable of paying household expenses is considered, including adult children. Copies of income tax returns are provided to verify the capability, or lack thereof, to pay the mortgage under the current circumstances.

4. Principle Also Changes

When apply for a loan modification, do not expect the principle to be reduced.  In most cases, the lender wants all of their money back. While the bank may forgive the principle on a second mortgage, if the property is being sold, the principle on the primary mortgage generally stays the same.

However, the lender has a couple of options to employ, in the effort to reduce the monthly payment and still receive the entirety of the loan.  Lenders can reschedule a balloon payment at the end of the loan.  Essentially, a chunk of the principle is moved to the end of the loan-interest free.  When the debt is paid off, the balloon payment comes due.  The last chunk has no interest assessed, so it is basically free money.

Another option is stretching out the loan.  Instead of a 30 year home loan, the bank can extend the loan to 35-40 years.  Although the borrower ends up paying more money for the mortgage in the end, the monthly house payments are more affordable. If financial circumstances improve in the future, the debtor has the option to pay extra each month, and the additional portion is subtracted from the principle. In the long-term, a few extra bucks, every time the mortgage is due, will reduce the length of the mortgage.

5. Only FannieMae or FreddieMac Loans Apply

With the economy in a pinch, the need for loan modifications and assistance is growing.  In an effort to stimulate the economy, boost the housing market, and keep homeowners in their dwelling, the government does offer refinancing for homes financed under the FannieMae or FreddieMac debacle.   The key is to discover whether the loan originally came through one of these two entities.  To discover if a home can be refinanced through a government plan, got to fanniemae.com or freddiemac.com and enter the street address of the mortgage in question.  Even if the loan is paid to a local bank, it may still be financed through the troubled lenders.  Thus, it is worth check out.

The government assists homeowners that do not quite qualify for traditional refinancing.  Homeowners that are approximately 25% short, or less, of the money needed can apply to the Federal Government for help.  However, for those seeking loan modifications, the source of the money really has no bearing.  Talk with a bankruptcy lawyer, discuss the options, apply for modification, and have a negotiator assigned to discuss how the debt can be satisfied with more affordable terms.

6. Lender must Modify, if Debtor Qualifies

Do not assume that the lender must modify a loan, if the debtor qualifies for the government plan.  It is a plan, not a mandate.  A modification is at the discretion of the bank or other loan entity.  The government offers an incentive to encourage lenders to reduce the monthly payment amounts for borrowers.

Once the loan modification is approved, the lender receives a cash payment in the vicinity of $2,250.  Sometimes, the amount varies, depending on each situation.  But, in order to qualify, the homeowner must be:

• Current on the mortgage payments.
• Use the property for a primary residence
• Obtained the loan before January 2009
• Some other basic criteria

But, the lender is not required by law to help the borrower.  A mortgage contract is legal and binding.  Any changes to the repayment plan depend on the overall benefit for the lender and their good graces.

7. Late Payments are a Criterion

Once upon a time, a borrower had to be delinquent of 1, 2, or 3 payments before a lender recognized any financial hardship.  If the payments are kept current, the lender has the ability to pay.  However, when the government passed Making Homes More Affordable, it made it easier for borrowers to ask for assistance, before giving up food and heat, in order to meet the mortgage.  When the basic necessities of life are being sacrificed, and all the fat is trimmed from the budget, it is time to seek a loan modification.

Purposely letting mortgage payments go, in order to convince the bank to grant a modification, is not the answer.  Being in arrears is no guarantee the lender will look kindly on reorganizing the loan.  On the contrary, a good credit standing is often what sees people through during tough economic times. Getting behind in the mortgage will adversely affect finances for years.  Even when the family budget has plenty of room to spare, in the future, making major purchases or buying anything on credit will be virtually impossible.

If keeping up with the mortgage is a financial hardship, a loan modification is a possible solution. But, do not exaggerate the financial challenges.  Offer to pay as much as possible.  If the situation seems hopeless, and no money is available, selling the property at a loss, or giving it back to the lender is probably the answer.  At least, the principle will be forgiven.  So, before landing out on the street, seek the advice of a good attorney who can explain the risks and benefits of any financial solutions.