If you understand how loan modifications work, then you will know what to expect of them. Knowing that will enable you to determine whether or not they will help you. Also referred to as mortgage rearrangements, first a quick summary of what they are not.
They are not mortgage refinance. A modification is intended for people with mortgages that have arrears through having difficulty making their monthly repayments - refinancing is not available if you are behind with your mortgage payments. A mortgage loan modification is provided by your mortgage lender, reluctantly in many cases, in order to enable you to continue to pay your mortgage and prevent foreclosure.
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Unfortunately, foreclosure is a lot simpler for your lender, and is an automated process which is not considered on an individual basis. It is a means whereby lenders can take possession of your property, and then sell it to recover their loan, and being automated does not cost them much. Loan modifications, on the other hand, are considered individually, take time and are therefore costly to the lender.
Some lenders might consider that losing the interest, which after is all is how they make their money, will have an impact on their overall profit and so be more susceptible to modification applications, while others, particularly the larger lenders such as banks and the more popular building societies, do not necessarily take that view.
In fact, since the collapse of the sub prime mortgage industry, lenders have been tending to foreclose on anybody that appears to be a risk, and they have rocketed over the past year. In fact foreclosures in 2008 were over 80% higher than in 2007, and the rise appeared to be accelerating into 2009. That is why President Obama took steps to try to halt this increase by introducing the Foreclosure-Prevention Program in March, 2009 - but more on that shortly.
A modification to your mortgage loan has the effect of lowering your monthly payments. It is not a solution if you have been made unemployed, unless you are about to restart work, and then it might work for you. It is not even best if you have been ill and been unable to pay your mortgage costs through loss of income or large medical bills. If your problem is temporary you should be able to come to a voluntary agreement to repay a bit more each month until you have made up the arrears.
It is basically for you if you have a general problem meeting the repayments month after month. Perhaps the interest has increased and your payments have risen accordingly to a level that is impossible for you to tolerate. Then a mortgage loan modification might be possible to reduce your monthly repayments to a manageable level. That can be done by reducing your interest rate, by reducing your capital or principal in some cases, or by extending the period over which you are to pay the mortgage - say from 25 years to 30 years.
That would increase the amount of interest you pay overall, but it would also reduce the amount you repay each month. So what does President Obama's Program say? Basically it states that those that meet certain criteria may apply for mortgage loan modifications. These criteria are:Your home must be your main residence - this does not apply to second homes. You must owe less than $729,750 on your mortgage. You must have purchased your home prior to 1st January, 2009. You must be paying more than 31% of your gross monthly income in monthly repayments. In order to qualify you have to prove that you have been trying to have your mortgage modified by your lender without success. If your application is approved, then the lender has to bring your repayments down to at least 38% of your gross income by, for example, extending the terms of the loan or lowering the interest rate to a minimum 2%. They could also lower the amount you owe, or apply principal forbearance, which means they stop charging interest on part of your loan. Once the 38% has been achieved, the lender is funded by the government to reduce your monthly payment from 38% to 31% of your gross monthly income. If you are already below 38%, it will then be reduced to 31%.
What you have to do is to provide proof of your lack of funds, and also send a letter explaining your extreme hardship and how you got into that position. You must prove to have been acting responsibly and are not totally responsible for your situation. There is a specific procedure, and certain forms that must be completed, and you might find the whole process difficult to do by yourself.
However, there is help online, and if you cannot afford to employ an expert to carry out the entire process for you, then there are DIY packs available that take you through the whole procedure, offering help with the documentation and how to fill in the forms, etc. Loan modifications are very useful if your problems would be resolved if you had less to pay each month, but not if that is not the root of your problem. Then you need the advice of a financial advisor.
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