Loan Modification 101

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Why a Loan modification might be right for you

Loan Modifications are by far one of the most advertised for, yet misunderstood services. First, regardless of what any advertiser tells you, not everyone qualifies for loan modifications. You must have some form of income that is verifiable (i.e., standard income, long term disability, Social Security, passive income, etc.), and that does not include unemployment benefits. In addition to the above, you may also use the income from others living with you who are not listed on either the note or the mortgage when applying for a loan modification. We call these non-borrower contributions. This is an invaluable tool for getting loan modifications and we use this method regularly.


Loan Modifications and principal reductions

We frequently get asked about the possibility of both interest rate and principal reductions in loan modifications. We see interest rate reductions almost as a matter of course with loan modifications. The actual rate reduction depends upon your original rate and the lender, but we have seen many rates reduced to as low as 2% in recent months, which is extremely beneficial in obtaining any loan modification. Getting a principal reduction is a whole different issue. Although many advertisers try to bait you with principal reductions in loan modifications, it is very rarely achieved (although I will discuss how we can get them below). Although there are ways to get a principal reduction, I want to discuss a few problems frequently encountered what applying for a loan modification. But keep in mind, even without principal reductions, decreased payments are almost always obtained in loan modifications.


Things to consider

First, how far behind is the borrower behind on payments? Many times, a client approaches me with a loan modification request after they are already deep in the foreclosure process and behind three or four years on payments. Any principal reduction in this scenario will be negligible, and in fact, the borrower will see a principal increase in the actual loan modification. Why, because the lender will tack on all overdue payments onto the end of the loan (called a balloon payment). The good news is that we have found a way around this in some scenarios, but it is never guaranteed. I will discuss this in greater detail below, but this is the reason that it is of the utmost importance that you contact as attorney as soon as you fall behind on your payments.


The truth about Loan Modifications and principal reductions

Second, there is a lot of hype around loan modifications that simply isn't true. I can't tell you how many clients come to us from other firms that advertised for principal reductions, and promised it too, only to have the client come to us without any offers from the bank, or with an increased payment. Here's the dirty little secret, principal reductions in loan modifications are the exception and not the rule. Any attorney who tells you otherwise is not begin honest with you, its as simple as that. There was so much hype about loan modifications through the HAMP program that was never true. Unfortunately, because of unethical advertisers and scam artists, many people were taken by people who promised principal reductions in loan modification but never delivered.


Here's how we handle, and have obtained offers from lenders regarding principal reductions.

We call them disappearing balloons. Here's how it works. Let's assume that you owe $100,000.00 on your home with an $800.00/month payment, and you are two years behind on the loan. The bank may tack on all back payments to the back of your loan so that you may actually owe about $120,000.00 on your actual loan modification. The bank may amortize the loan over 30 years at 3% based on a principal of $80,000.00 with a $40,000.00 balloon payment due on the 360th payment. That freaks out a lot of people, but at the same time, it significantly reduces the payment. In some scenarios, we have negotiated, and had banks agree to erase a percentage of the balloon every time a certain amount of payments have been timely made. For example, if five years of timely payments are made 25% of the balloon is waived. If another 5 years of payments are timely made, 50% of the balloon is waived, and so on. I have seen banks more willing to allow this sort of loan modification in some scenarios.


What to do!

Although the above is a simply snapshot of examples that we frequently encounter, we encourage you to contact an attorney about your specific case. We are confident that a reputable law firm can assist you in obtaining a beneficial loan modification so that you will not have to be uprooted.

Additional Resources

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