Loan Modifications Explained

The recent HAFA Federal program has improved the process of loan modifications since April. It is a slow process but can be worthwhile. It requires documenting pay checks, bank statements, tax returns and filing out a staement of your average month's expenses. The current administration has offered a wide-ranging plan to benefit those homeowners suffering from staggering debt. President Obama's notion is that too many American homeowners make monthly mortgage payments which account for over 50% of their monthly income. The plan includes a number of elements detailed below.

Paramount to a successful plan is the belief that the crux is not that a home is now worth less than it was a year ago; the bottom line is that homeowners will remain in their homes only as long as they can afford to make their payments. To that end, the administration seeks to reduce the monthly amount a homeowner pays to satisfy the bank. One key figure the administration uses is 31%. There is a widely held belief that most homeowners will not default as long as their monthly housing cost doesn't exceed 31% of their monthly income. To encourage lenders and attorneys to participate in this program, cash incentives are to be offered. Mortgage bankers will be offered $1,000 for each loan modification to which they agree. This might be extended for from three to five years. Homeowners facing foreclosure will have $1,000 reduced from the principal of their loan annually for up to five years as long as timely payments are made. Three months of payments at the new rate are required before either party can obtain their cash incentive.

This loan modification plan is designed for owner-occupied residences and not for speculators. In order to participate, a homeowner will have to prove financial hardship. This will be shown through detailed financial statements and a review of the homeowners credit report. The administration has made it clear that speculators (such as the "fix-and-flip" set) are not to be included; this is a financial recovery plan to help thousands of Americans get some relief fromrising interest rates, property devaluation, and decreasing FICO scores. Also included will be a Net Present Value Test. This is a formula which allows the lender to determine whether the rate of return would be better after a loan modification. President Obama's Loan Modification Plan will benefit tens of thousands of American homeowners.

Loan Modifications Solutions
Loan modification is a foreclosure prevention measure to protect the borrower from rising mortgage payments from an adjustable loan, or used by borrowers who have suffered a loss in their monthly income and are no longer able to pay their fixed loan payment. Whatever the reason, banks are understanding of this nationwide financial crisis and, in most cases, are ready, willing and able to help.

To be eligible for a loan modification, the borrower must provide documentation that the monthly earnings are no longer satisfactory to cover the current mortgage payments. This may be due to a loss of income from one or more names on the property title, or that the adjusted rate has climbed above what the borrower is able to pay. In some cases, the bank holding the loan balance is happy to comply and will offer an attractive agreement to the borrower.

Home owners who are feeling the financial pinch should contact a free credit counselor as soon as possible. We recommend that owners call one of the non-profit alliances and speak to an approved credit counselor before calling your lender. It is free and you can get an an idea of your eligibility for a loan modification. Try Hope Now or NACA

http://www.hopenow.com - Hope Now - 888-995-HOPE
http://www.naca.com - Neighborhood Assistance Corporation of America

Other Benefits of Loan Modifications
Loan modifications are primarily designed to lower the interest rate on your mortgage. That is typically what is done. Sometimes they will extend the term of the loan, up to as much as 40 years, effectively reducing your monthly payments. In rare cases, lenders can reduce the principal of the loan, but don't expect that to happen very often.
So, Loan Modifications Reduce My Interest Rate? So What? With many loans, especially loans that are newer, the bulk of your monthly payment is going to pay down the interest. A very small part of the monthly payment is being applied to the principal. If your interest rate is reduced, then your monthly payments will also be reduced. This is especially true of many of the sub prime loans that carried higher interest rates, sometimes shockingly high. Loan modifications can reduce that interest rate, reducing the amount of money you would be paying every month. A 30 year loan for 300,000 made on Jan 1st 2008 with a 7% interest rate, for example, would put the homeowner paying $1995.91 a month. That same loan, with a 6% interest rate lowers the monthly payments to $1798.65 a month, a 200 dollar a month reduction. Reduce the interest rate to 5%, the monthly payments drop to 1610.46 a month, an almost 400 dollar a month reduction from the original monthly payments. Loan modifications are really starting to sound pretty nice, aren't they?

Sounds Good. How Long Will They Take?
Unfortunately, there is no set answer. Each situation will be different, but typically it will be 30 - 90 days. What you can do to help speed up the process, however, is to have all your ducks in a row. Find out what paperwork your lender will need, and get all of it ready. Honest, open communication is the key here. But don't sit back and wait for your lender to contact you. It is good to keep pushing them to hurry up and get things straightened out. Yes, foreclosure proceedings will stop once you start with loan modifications, but the sooner your loan modifications are resolved, the easier you will sleep at night