Home Loan Modification FAQ

What is a loan modification?

A loan modification is a change in the original mortgage to benefit the homeowner. Some of the benefits that a homeowner can receive from a modification are a reduction in interest rate, a reduction in principal, forgiveness of late fees or other penalties, lengthening the loan term, forbearing interest until the end of the loan term, and capping the monthly mortgage payment to a reasonable payment that is affordable to the borrower.

What is an acceptable Hardship situation?

An acceptable hardship could be many different scenarios such as a loss of income or loss of job, higher expenses, a death or illness in the family, an ARM (adjustable rate mortgage), divorce, an increase in expenses due to a new unexpected debt, federal or state tax issue, lawsuit settlement or any one of a hundred different scenarios that make it harder to pay your bills.

Can I do a loan modification myself or should I pay someone to represent me?

Unlike what most Attorneys will tell you, you can do a loan modification yourself. Your lender will encourage you to proceed with a loan modification without the use of an attorney so you can save money and have more money to make mortgage payments.  Before starting a modification, I would encourage you to do research so that you structure your loan modification in a way that it gives you the lowest possible payment. 

Can I get my principal reduced if the loan amount is greater than the value of the house?

It is possible to get your principal reduced if you are “upside down on your house”, owe more than the house is worth.  This is a scenario that most people wish for but rarely it happens.  Typically, a modified mortgage will consist of a loan payment based on a principal amount with an affordable payment at an interest rate of as low as 2% and stretched out up to 40 years.  If the new principal amount of your mortgage is lower than the original mortgage principal, the difference between the two principals typically will be your new deferred balance or could be a principal reduction.  In most cases the difference will be your new deferred balance.  This new deferred balance does not collect interest and you will not have to make payments on that amount until your new loan term is due in full, typically in 30 years.

The difference between your original principal balance and your new principal balance could also be your new principal reduction.  Keep in mind that if your principal is forgiven, you will get a 1099-C form for the forgiveness of debt.  This means that the forgiveness of debt will give you additional income for the year and it will be taxed as ordinary income.  This is a small price to pay for a free gift.

Do I have to be currently delinquent on my payments to get a loan modification?

There is a common misconception regarding loan modifications and that is that most people think that you have to be late on your mortgage payment to get a loan modification.  That is not true.  The whole idea of the loan modification program is to help home owners before they go late on their mortgage payments.  Studies have shown that once a home owner is more than ninety days late on their mortgage payment, the majority of the time the homeowner will end up losing their home to foreclosure.  Lenders realize this and want to get help to the homeowners who are on the verge of being late on their mortgage.  The whole idea of loan modifications is to keep homeowners in their homes and stop the foreclosure fiasco.  It does not matter if you are late on your mortgage or on time, you can get a modification either way.

This article is the sixth of a Do-It-Yourself approach to home loan modifications. Check back often or subscribe to this site to stay tuned for the next article in this series (a new post will come out each week day for a month), designed to help you complete a loan modification on your own, cutting out the middle man, helping you protect your ability to stay in your home for the best price possible, and helping you lower your payments as much as possible. After all, nobody will look out for you as well as you can look out for yourself.

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