10 Truths about Loan Modifications

Loan modifications are still be a tough option to achieve. This is very true. There have been a lot of reports from the media that talk about the droves of scam artists that are taking advantage of homeowners in today’s ailing real estate market. We want to shed some light on loan modifications, and if in fact they can help you or your plan with your current situation. That is a really good question.

Typically, many homeowners that are in need of a loan modification have a hardship, such as a loss, a new job, a reduction in income, divorce or medical issues that cause financial burden. The hardships are pretty much used the same for a short sale approval as they are with a loan modification, but there are many homeowners that are in need of a loan modification because they foresee that they will be in trouble in the future because they cannot refinance out of the loan that will adjust in the near future. So in 2010, it was expected that roughly $28 billion of adjustable rate loans would reset, and mortgage payments would adjust much higher after the agreed fixed term on their mortgage. Many homeowners are looking for a way to preserve their homeownership. Now, loan modification is an agreement to change the terms of your mortgage. This can include a reduction in your rate or principal balance, the term of the mortgage. For example, going from a 10 year fixed to a 30 year fixed, whether or not it has an interest only option, and sometimes it can include arrears that are thrown back into the principal of the loan.

Now, to better understand a homeowners chance of getting a loan modification, here are ten truths to know. It has been reported that candidates who have received a loan modification have re-defaulted again within six months. Number two, in order to get a loan modification approved, you need to have enough income to cover all of your monthly expenses. For example, if your current monthly expenses allow for $200.00 left in the bank for savings, you may be able to qualify for a loan modification. The idea is that the loan modification would allow you to save more money and build your financial status. So what this means also is that if you’re in a negative $1,000.00 a month, the bank is going to have to modify your loan quite a bit to reduce your amount so you’re at a breakeven point or you’re saving a little bit. Now, if it becomes very unreasonable, such as the numbers work out where they’re giving you a loan at 1 percent, most likely your loan modification will not get approved.

Number three truth about loan modifications is you do need to have proof of a stable job. It will count towards your qualification. The number of years you have worked consistently with a company will be taken into consideration. Also, having some savings and retirement account could help as well.

Now, number four, if you are not late on your mortgage, it will be harder to get a loan modification approved. Lenders may not state it, but being late is proof that you are having financial issues and are more willing to help when you are in this position. This is the same for short sales. It is a reason why some homeowners have been advised to miss payments prior to requesting a loan modification.

Number five, loan modifications can take anywhere from one to 12 months to complete, depending on your situation. Now, we’ve heard of clients that has taken much longer, so with the high volume of loan modifications, especially in 2010, it is unknown how difficult it will be to get loan modifications approved.

Number six, many loan modifications that can be done quickly are changes in the mortgage term to reduce the monthly payment, but this is usually for short term, such as two to three years. After this period, the rates will go up and so will the payments. This is happening because the lender is trying to buy time, hopefully help you out for a short period of time, reducing your rate, reducing your payments, but eventually they are hoping that you will get back on your feet, have more money in two or three years to continue the adjustable payment.

Number seven, it is possible for some lenders to offer a loan modification of a new fixed rate over 30 years. That has been happening a lot. Number eight, attempting a reduction in the rate and principal is generally more difficult to obtain. And a lender would rather give you a lower rate for a longer period than a reduced principal.

Number nine, if you have multiple liens on your property, it is more important to get a loan modification on the loan with the higher balance. That’s just a common sense, but most likely it will be your primary mortgage, your first mortgage, that you will want a loan modification to be adjusted.

Number ten truth of loan modification is that many loan modifications do not get approved. That’s a fact. If you are at risk at being late or are already late, start a loan modification immediately to allow time for you to pursue other options if needed, such as a short sale or bankruptcy.