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Everyone should know about loan modifications

loan modificationsWith the collapse of the real estate market and the large number of homeowners that ended up struggling to pay their mortgage, there has been a lot of talk about loan modifications, loss mitigation, and loan default. When a borrower is eligible for a loan modification, it is often in the best interest of the lender to work with them to restructure the loan. In most cases, the value of a current mortgage is more than if the property goes back to the lender by foreclosure. It is actually illegal for a mortgage lender to profit from the sale of a foreclosed home, so they are motivated to work with distressed borrowers.

Who is eligible?
Programs are available for owner-occupants who have an unpaid balance less than $729,750. Borrowers have to provide pay stubs or tax returns to prove income and be willing to sign a financial hardship affidavit. There are no programs available for investors, vacant homes, or condemned properties. Surplus income for the borrower has to be at least $300 and a minimum of 15 percent of their monthly earnings.

In rare instances, it is possible to obtain a loan modification when the original borrower loses their job, but the spouse is employed, even if the spouse is not on the original mortgage. For that situation, the lender has to conduct a full financial review of the income and expenses for the household. The surplus income cannot be enough to pay the amount the loan is in arrears but must be enough to pay the modified monthly payment. Even then, the mortgage company has to check with their legal department before modifying the loan, because the spouse was not part of the original mortgage.

How the interest rate is determined
Lenders modify the loan according to the current market rate. The rules state: “the interest amount cannot be higher than 25 basis points of the most recent Freddie Mac Weekly Primary Mortgage Market Survey (PMMS) Rate for a 30-year mortgage. That is for a fixed rate conforming mortgage (average for the US) and rounded to the nearest 0.125 percent. The rate is determined by the day the Trial Payment Plan is made available to the individual who is behind on the original note”.

The lenders will amortize the outstanding balance of the mortgage over a 360-month period. The actual interest rate will be determined by the market rate on the day the permanent modification is executed. For more information about the process of loan modifications, answers are available at

Other loan modification details
The lender should waive all late fees. Legal fees and costs related to the foreclosure process can be added to the newly modified balance. The lender will most likely want to do an interior inspection of the property. They are allowed, as they deem necessary, to confirm the property does not have any damage or condition that will interfere with the borrower’s ability to continue to make the newly modified monthly payment.


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