A loan modification can take several forms. It is a permanent change in the original agreement made between you and your bank.
The items that can be changed include the interest rate, the length of the mortgage, the amount of the monthly payments and the amount of the principal, but only in rare cases is the principal reduced. Usually, adjustments are made that increase the principal in order to cover any past due amount or other charges that could result in a lien being placed on the property.
Banks all have waiting periods. Some lenders seem to take longer than others to get back to their customers. Bank of America, for example, has been mentioned in hundreds of complaints to the Florida state attorney general for failure to act promptly when contacted by homeowners.
Typically, a bank will offer the customer a “trial period.” If you are offered a trial, you will be asked to make your payments on time for three months in a row. Some banks allow you to make the modified, lower payment. Others ask for your current payment, whatever that may be.
You may be asked to provide proof of income, as you did when you obtained the original loan. Whether or not things have changed with your income is one of the aspects of your current financial situation that the banks will look at.
In normal refinancing, a lender will usually deny applications when the home’s value has fallen below the loan amount. This is one of the things that the government was able to change. It was an important change, because home values have fallen across the country.
So, even if you have tried and failed to obtain refinancing in the past, you may qualify for a new loan modification. The government program is called the Home Affordable Modification Program. Some half a million mortgage holders are currently in the trial process for the program.
In order to qualify for the program, your original loan must have originated on or before January 1st, 2009. Two recent pay stubs and the most recent tax return must be submitted and you must sign an affidavit of financial hardship.
In addition to the loan modification, which will be available only until December of 2012, unless changes to the current program are made, there is a refinance program that ends in June 2010. There are other options that can help you avoid foreclosure, as well.
Several companies are offering to buy properties from homeowners that are facing foreclosure. That could save your credit rating from the damage that a foreclosure can do.
There are also foreclosure prevention services that help homeowners with the negotiations, which can sometimes be lengthy and confusing. The companies charge various fees for these services. So, it’s a good idea to do a little comparative shopping before you sign up for the service.
You might be wondering how much lower your payments will be with a loan modification. While that depends largely on the original interest rate, the principal and the length of the loan, some homeowners have had their monthly payment reduced by nearly $100.
Temporary modifications are another suggestion made by some banks. Instead of getting a fixed rate for the life of the loan, the bank could reduce your payment for a period of five years or more.
A temporary mortgage modification is a good idea for someone that expects their financial situation to improve over the next few years. If you or your spouse is currently unemployed, for example, you may be able to afford a higher payment in five years.
The goal is to get the payments down to around 30% of your monthly income. That is considered affordable by financial experts. If your income is not sufficient for even a reduced payment, then you will have to consider other alternatives, such as selling your home. But, with the loan modification and refinancing programs, as well as other available options, you should be able to avoid foreclosure.