Do You Really Understand Your Loan Modification?

I talk to so many people that have accepted loan modification terms, but really don’t understand the nuances.  Those “nuances” are the terms, and can be quite a shock when the term ends.

Granted, not all loan modification are the same; however if you have a loan modification look at it carefully, or ask Jerry or myself to walk you through it.  It might be time to start planning your exit strategy.

 

Forbearance and Repayment Plan

A forbearance is when the lender temporarily reduces payments for the borrower, perhaps to get them through a short-term financial hardship. It can also be a repayment plan which allows you to payback the defaulted amount over a period of time (you must still pay your regular monthly payment).  In other forbearance agreements the lender adds the defaulted payments to the  principal balance and there will be a balance due at the end of the original term of the loan (ie: 30 yr loan).  The lender expects to recoup the full difference at the end of the forbearance period.

Interest Rate Reduction

The interest rate is temporarily reduced for a period of time.  Normally 6 years.  Here is where it gets tricky.  On the start of the 7th year you will be required to refinance, yes, they have actually changed the original term of the loan being due!    In some cases if you have paid on time during the 6yr modification they may extend the terms.  Some interest rate reductions are for the remaining term of the loan. In general, these permanent reductions are given to borrowers whom had perfect credit and full documentation loans from the on-set, due to their assets or employment stability. The interest income that the lender gives up during the rate reduction can be added to the principal of the loan.

Loan Extension

This is a change in the length of the term of the loan. The term may be extended from 30 years to 40 years.  This happens after a certain term (usually 6years) and with a on-time payment record.  The Lender will also look at your credit to determine if you have been able to maintain on payments for all creditors.

Partial Claim

This is specifically for FHA (Federal Housing Administration) insured loans, and is for borrowers that are at least four months delinquent on the property in which they live. The borrower must be able to document the hardship that caused them to miss the payments. They must also be able to prove that they are now capable of making the full mortgage payment, and are unable to make up the missed payments and fees. The fees and missed payments incurred before the loan modification are rolled together into a zero interest second mortgage, and are due when the property is either refinanced or sold.

Principal Deferral

The lender will modify the loan to lower the payments by deferring payment on a portion of the principal balance “principal deferral”.  The new payment will also reduce the principal balance, but only on the modified balance. In addition, the deferral may be for a specific period.  will also reduce the amount of principal that is paid off with each payment. Again, here’s where it gets tricky, on the start of the 7th year you will be required to refinance, yes, they have actually changed the original term of the loan being due!  The deferred principal is due when the property is refinanced or sold, or when the loan matures.

Reinstatement

Not actually a loan modification itself, but is the term used to describe when a delinquent mortgage is made current by the borrower. This means they have caught up on all of the missed payments and paid all the late/missed payment fees that the lender has imposed. The borrower may still have suffered damaged credit, but the foreclosure process is stopped.

After understanding your loan modification it’s time to make a plan.  Many people wait until the time period is up, and find themselves in  a pickle.  It is important during this period to do 4 things:

  • Maintain and build your credit score
  • Do not co-sign for anyone!
  • Reduce bills
  • Save money

If you truly want to stay in your home you must be able to refinance.  You want the best rate and the higher your credit score the better the rate.  If you co-sign for somebody even if they are making the payments it will still count against you ESPECIALLY if they have late payment history.  Obviously, reducing bills reduces stress.  More importantly if you refinance and your mortgage payment goes up the less “other” payments you have the more you will be able to handle the increased mortgage payment.  Save money.  If you are unable to refinance, and you don’t have enough equity to sell and re-purchase you will need money to move, 1st, last and security deposit on a rental, and for general emergencies.

In closing, if you feel that you cannot meet the terms of the loan modification and you are in jeopardy of defaulting again, then it may be wise to sell your home and save your credit to purchase a more affordable home.  If it goes too far and foreclosure proceedings have begun you will not be able to purchase again for 7 years!  If you do a short sale (you owe more than the value of the property) it is still better than a foreclosure.  You will be able to purchase again in 2-3 years.