Loan Modification Fact and Fiction – Who Qualifies and What Can Be Modified

  • Do you owe more than your house is worth?
  • Has your rate adjusted so high you cannot make your monthly payments?
  • Have you received calls or mail offering loan modification services?

This article explains who qualifies for a loan modification. It describes what can be negotiated with lender and gives advice on how to decide whether to seek a loan modification alone or hire an expert.

Should you hire someone to help you with loan modification?

The answer is maybe, maybe not. Before you retain a firm to negotiate on your behalf, understand that you can negotiate by yourself. There is no “magic” that lawyers, mortgage brokers or anyone else can bring to a loan modification negotiation. Homeowners can avail themselves of the free information available from HUD and the California Department of Real Estate and attempt to negotiate a loan modification by themselves. A lawyer or broker can communicate on your behalf and attempt to negotiate a modification of the terms of the loan, so can you. Recently, California enacted Senate Bill 94 which prohibits upfront fees for residential loan modification services. As a result most loan modification providers have stopped offering services.

Should a homeowner use a lawyer or a company that ‘specializes’ in loan modification?

Homeowners behind on their mortgage payments are often contacted by individuals or companies that will offer to help work out a loan modification. But California law now forbids anyone accepting upfront fees. Any person or company who seeks upfront fees is breaking the law now that SB 94 has been filed. The loan modification industry was fraught with deceptive practices. Numerous companies in California attempted to take advantage of desperate homeowners by offering to help them save their homes. Many over promise and under deliver. Brokers cannot provide legal advice and may not have anymore knowledge about real estate law than a homeowner can obtain from HUD and the California Department of Real Estate.

What can a lawyer do that a homeowner cannot do for himself?

The lawyer can review the loan for statutory defects that might be used as bargaining chips with the lender, but the most important thing a lawyer can do is act as an unemotional advocate and attempt to persuade the lender that the loan modification is the best interests of both parties. In other words the lender will make more money by agreeing to loan modification than foreclosing on the property. Most lawyers prepare a report highlighting the homeowner’s financial situation and describing why a loan modification makes sense for both the homeowner and the lender.

What can be negotiated with the lender?

Reinstatement: Your lender may agree to let you pay the total amount you are behind, in a lump sum payment and by a specific date. This is often combined with forbearance when you can show that funds from a bonus, tax refund, or other source will become available at a specific time in the future.

Forbearance: Your lender may offer a temporary reduction or suspension of your mortgage payments while you get back on your feet. Forbearance is often combined with a reinstatement or a repayment plan to pay off the missed or reduced mortgage payments.

Repayment Plan: This is an agreement that gives you a fixed amount of time to repay the amount you are behind by combining a portion of what is past due with your regular monthly payment. At the end of the repayment period you have gradually paid back the amount of your mortgage that was delinquent.

Loan term changes: This is a written agreement between you and your mortgage company that permanently changes one or more of the original terms of your note to make the payments more affordable. This is the goal of most homeowners in trouble on the home loans. A loan modification agreement changes the terms of your loan– a lower interest rate, an extension of the loan life, conversion of an adjustable rate loan to a fixed rate loan maybe effected.

What are the problems with loan modification?

Many people will not qualify. Good candidates are homeowners who have a demonstrable reason they fell behind, like a change in their income or loan amount, and can prove that they have sufficient income to make the payments if the loan terms are changed. The mortgage business is a business. A loan holder will not consider modifying a loan unless the homeowner can afford to make the new payments. If homeowner is current, paying on time, he or she is unlikely to obtain a modification. Loan servicing companies are less likely to negotiate than banks because they often lack the power to modify the loans.

If you are considering loan modification, check out all the free information available. Think hard about trying to do it yourself. If you decide to obtain help a qualified attorney can explain the law, review your situation and guide you toward the most appropriate choices.

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Gwen Josephine

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