Many homeowners are happy, relieved and sign away on documents that they don’t fully understand when their lender/bank offers a loan modification, not realizing that the loan will not work to their advantage.Regrettably, for many homeowners they do not recognize that a loan modification should be a bilateral mutual agreement with all terms of the loan being understood and worked to the best interest of both parties. Unfortunately, these loans have proven to be a unilateral agreement because the majority of loan modifications have proven to default within the first year or two.
So, the question becomes how do you achieve a successful loan modification workout?
To achieve a successful loan modification workout it should be strategically planned and implemented to your advantage. After all, you’re the one that writes the check every month. Therefore, give lots of thought to your income and expenses and start from there. Be absolutely decisive on how you plan to lower your payments by addressing the price and terms of the loan (see below):
1. Do not waste your time speaking with the collection agency for your lender. There primary job is to make sure that you pay the delinquent amount. Be sure to contact the right person(s) that handle your account. If your loan is in default, it will be assigned to a “Negotiator in the Loss Mitigation Department” or it may be your bank/lender’s loan servicing operation. Be sure to get the name of the Negotiator and deal directly with them. The negotiator will send a loan modification package that must be filled in. When it has been received by him/her (which may take a few weeks), then follow up and begin negotiating for the following:
Reduce the Interest Rate
a) Request a lower fixed interest rate with a minimum of 2% lower than your existing rate. However, I strongly suggest that you request the lowest fixed rate existing in the current market.
Increase the Term of the Loan
b) Request a term of 30 or 40 years. A 40 year amortization will lower your payment even more and will help keep your mortgage payments affordable. However, consider carefully increasing the term of the loan if it does not significantly reduce your mortgage payments.
Lower the Existing Loan Balance
c) Request a principal reduction that is equal to the current market value of your home. If you owe $300,000 on your home and the current market value is $150,000, then negotiate for a principal reduction of $150,000 or close to that number. Principal reductions are not offered to homeowners that have a Fannie Mae or Freddie Mac loan, except California. Only a limited number of California homeowners (8,500-9,000) will be able to get principal reductions according to Los Angeles Times reported September 12, 2012.
Pay of the Second Lien
d) If you have a second mortgage with the same lender, negotiate to pay off that loan with cash, borrow funds or any other means to settle that account. Usually, second trust deeds can be negotiated for pennies on the dollar even if the loan is with a different lender.
2. Most loan modification lenders using the HAMP or any of the Making Home Affordable Programs will use a mortgage payment guideline of 31% of your gross income (not net income). This has always been a standard rule lenders use in evaluating mortgage payments which includes principal, interest, taxes and insurance.
3. Most lenders will want to include past due delinquent payments, late fees, penalties, attorney fees, closing cost fees and other such junk fees that should be omitted. Avoid agreeing to such fees unless it can be reasonably negotiated. If delinquent payments cannot be negotiated, then request that the payments be placed on the back of the modified loan without accrued interest and due and payable at loan payoff. This will assure you of keeping your mortgage payments low. Remember to negotiate any fees that they insist you pay if they are playing “hardball.”
4. Be informed with regards to the various loan programs that have been implemented by the Obama Administration such as HAMP, HAFA, HARP, HAUP, Second Lien Modification (2MP), Principal Reduction Program, Hardest Hit Fund Program and more. All of these programs were designed to assist distressed homeowners that are facing foreclosure. Be sure to read Foreclosure Solutions…Solutions to Foreclosure and understand the various programs that can work to your benefit and will explain how to qualify.
5. Document all records, phone conversations, emails, faxes, and all communication with the negotiator. It is extremely important to act as professional, calm and persistent as possible.
6. If you are facing the inevitable…meaning there is no way to save your home, then a short sale or deed in lieu of foreclosure are options that may be the least invasive until you regain financial stability. The HAFA Program was designed to help homeowners who would rather walk away without a foreclosure on record.
A successful loan modification workout can be achieved with careful and strategic planning. However, the key to receiving a loan modification that you can afford and live with is for you to be actively involved with the negotiating process until you can achieve the results you need even If you have hired a third party to work in your behalf.