A “Loan modification” is a highly searched term on the internet nowadays. For good reason. As we all know the rate of foreclosures is at an all time high and getting worse. Homeowners who are not able to make their house payments on time are trying to figure out what their options are so they don’t loose their home to foreclosures.
All over the news we hear the term “loan modification” being bandied about with ever increasing frequency. What is it? How does it work? Do I qualify? Will my lender participate? What if my home is worth less than the current liens? What if I am currently late on my mortgage payments?
My objective is to help homeowners who are behind or having a hard time making their payments, facing foreclosure or notice of default to understand their workout options and whether a loan would be right for their situation. If a borrower does not qualify or their lender won’t participate in the program than other loan workouts would need to be considered.
A typical loan modification plan may include lowering the interest rate,adding the payments which are behind to the end of the loan and or even extending the terms of the loan. This solution would generally be for a borrower whose income has changed permanently (lowered) and they do not expect it to go back up anytime soon. It would be best to show your lender that you have changed your habits and are spending less, have paid down debts and evidenced other steps of good financial management as they consider your request.
There are many other terms that fall under the concept of a loan workout, however, they do not modify the mortgage. Such terms you may have heard of include: foreclosure, forbearance, deed in lieu of foreclosure, NOD, Notice of Default, Cash for Keys, Short Sale, Listing home for sale, Repayment plan, Reinstatement and Bankruptcy.
A brief definition of each follows:
Foreclosure: Due to non-payment of note the trustee sells home on courthouse steps in an auction format.
Notice of Default (NOD): this notice is delivered to the borrower and states that the payments have not been paid as agreed and that if the amount owed plus certain expenses is not paid in full by a certain date that the home will be sold at auction.
Cash for Keys: The lender agrees to pay the defaulted homeowner a set amount of cash when they leave the property in good condition. Clean and undamaged.
Deed in lieu of Foreclosure: This option is where the owner gives the deed of the home back to the lender in order to avoid foreclosure proceedings.
Forbearance: The lender can “stay” the foreclosure process with a forbearance agreement between the lender and homeowner. When the homeowner faces a temporary financial hardship the lender may approve this option and allow the homeowner time to get back on their feet (so to speak) and resume payments at a later date and catch up on payments in arrears within a certain time frame. This would be used with “temporary hardship” conditions rather than a long term financial problem.
Short Sale: The lender accepts a ‘short payoff’ meaning that the proceeds to the lender upon the sale of the home is less than the current mortgage value. If there is a 2nd or 3rd mortgage those lenders would also have to accept a short payoff or complete write off of their loan(s).
Listing Home for Sale: Selling home on the open market usually through a local real estate agent and using the MLS (multiple listing service).
Repayment Plan: The amount you are behind can be broken up into smaller chunks and repaid over several months with your normal mortgage payment till you are ‘current’ on your mortgage.
Reinstatement: Once you have paid the lender the entire amount of past due payments plus any late fees than your mortgage is reinstated.
Chapter 13 Bankruptcy: This can give a homeowner time to reorganize their debts and enter into a repayment plan that incorporates all of their monthly obligations.
A word of caution: Always seek the advice of your attorney, financial planner and accountant before proceeding with any type of loan workout or modification program of your exiting mortgage or selling your home. Don’t delay when behind on payments – seek legal advise immediately and be in constant communication with your lender till your situation is resolved.