What is a Loan Modification and other Loan Modification answers

What is a Loan Modification?

According to the Hud website, A Loan Modification is a permanent change in one or more of the terms of a mortgagor’s loan, allows the loan to be reinstated, and results in a payment the mortgagor can afford.  We would add that it is accomplished with a refinancing the loans.  Which is frequently very difficult because of a negative equity or upside down  situation.

What are basic factors to consider?

Does the borrower wish to stay in the home.  If you do not wish to stay in the home you may wish to consider other options such as a deed in lieu of foreclosure or a short sale.  We would also add sometimes it makes sense to begin negotiations on a loan mod while concurrently listing the home for a short sale.  This way the borrower can determine which option is best for them.  We suggest a homeowner should conisder how each one of his or her loan workouts options will effect their credit, their tax exposure and their exposure to having to repay the remaining loan balance.

Should you stay current on your payments?

This is a very important question.  Some lenders require borrowers to be at least 60 days late and other lenders wish to have the borrowers remain current. Our advice is to remain current with the first loan until you have analyzed all your options.  It may not be wise to go into default on the first if you will have trouble reinstating the your loan (if need be).  Before you go into default please consider what will happen if you wind up facing a foreclosure.   We believe the seller should always consider protecting themselves from the worse case scenario.

What factors do lenders consider when qualifying borrowers for loan mods

Again the lenders have different programs, but, in general the lenders review:

1. Whether your required payments are increasing or will increase;
2. Whether your property is worth less than you owe;
3.  Priciple residence or investment;
4.  Change in income but still employed;
5. Debt to income ratios before an after the loan mod;
6. We are also seeing some evidence that lenders are more apt to offer beneficial loan mods to borrowers who explain that they have the option of just walking away under California law;
7. Basically, the lender needs to be convinced there is a good reason to create a lower monthly payment, that there is strong chance the borrower can afford to pay that lower monthly payment and that the lower monthly payment can be created by lowering the interest rate, the term of the loan, or by reducing the principle on the loan.  It should be note that principle reduction is not easliy negotiated; and
8. Whether borrowers have leverage against their lenders.  Borrowers should consider prudently using the California and Federal law to their utmost advantage.  If you are looking to obain a principle reduction you should be prepared to consider the tactical use of lender liability laws.

Also from the Hud Website:
Can a mortgagee qualify an asset for the Loan Modification option when the mortgagor is unemployed, the spouse is employed, but the spouse name is not on the mortgage?

Answer: Based upon this scenario, the mortgagee should conduct a financial review of the household income and expenses to determine if surplus income is sufficient to meet the new modified mortgage payment, but insufficient to pay back the arrearage. Once this process has been completed the mortgagee should then consult with their legal counsel to determine if the asset is eligible for a Loan Modification since the spouse is not on the original mortgage.