Loan Modifications and How to Rearrange a Mortgage

July 7, 2009 by Julio
Filed under Loan Modificiation

Loan modifications are ways of having rearrangements made to a loan so as to change the original repayment agreement. You can rearrange a mortgage, for example, if you are having difficulty with your payments, but could get by if these payments were reduced. They are not usually a way of managing extensive arrears, although in some cases your mortgage lender might be sympathetic.

This is because foreclosures and repossessions are rising at an alarming rate in the USA, and also throughout many western countries, particularly in the UK. Where a lender might at one time have foreclosed without a moment’s hesitation, some are now standing back and thinking the situation through. They rely on your repayments of interest in order that they make profits for their shareholders, and if the continue foreclosing on so many loans, all they are getting back is the capital, if even that, and so are making either nothing or a loss on the deal.

It therefore makes sense for them to give you time to get back on your feet after a change in your circumstances, such as redundancy and job loss due, for example, to the current economic climate. They will be less sympathetic, however, to somebody with a poor credit record, and who is simply not paying because they are overextending their credit.

However, if you have a genuine reason for being unable to pay, then a loan modification might be an ideal way for you to recover your credit position and keep your home in the face of foreclosure. If you have more general debt, such as overdue credit card repayments on which you have defaulted, and your home has no equity, then filing for bankruptcy under Chapter 7 might be more feasible. In this case you would likely keep your home if you can keep up the payments, but have your other debts retired.

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However, bankruptcy should be considered a final solution to your debt problems, and loan rearrangements are preferred as an initial step. They can be enforced by a judge if you file for bankruptcy under section 13, but you would then be bankrupt with all the negative connotations that entails. It is better to try for a modification without the bankruptcy if you can.

They are not, however, easy to get because bank managers and mortgage lenders are reluctant to allow them. However, even they can see that it is better you repay something than nothing at all, and given that you apply using the correct procedures, you will have a good chance of success.

This is since President Obama’s Foreclosure Prevention Program has started to take effect. Prior to that, mortgage lenders were unwilling to offer modifications to anybody not declared bankrupt, and there were even mortgage scams going on that actively prevented them. Now, however, anybody whose primary residence was purchased prior to 2009, and who owes less than $729,750 on it, can apply for a mortgage modification if they are paying more than 31% of their disposable income on the repayments. However, the aforementioned procedures still apply.

Bankers are very procedure-sensitive people, and you cannot just pick up a telephone or write a letter requesting loan modifications. The documentation must be right, and the forms must be completed exactly as they require. Your letter of severe hardship must be formatted in a certain way, and the procedures must all be followed to the letter.

It is doubtful if any individual could do all that by themselves, so DIY loan modifications must be carried out by following some guidance. That guidance can be personal, by using an advisor to walk you through it (or even do it for you), or in the form of a set of written instructions and templates. The latter way can and does work in many cases, and might be preferred if you are on a limited budget.

It is likely that your budget is limited, if you are unable to meet your mortgage repayments, and so the DIY package is likely the best way for you. They can be found online at a nominal cost: nothing compared to what you would lose if you were unsuccessful with your application through ignorance of the correct steps to take.

Loan modifications can take several forms, the most common being a reduction of interest, or change to an interest-only arrangements. The capital can also be modified, but whatever form it takes, it will help you to save your home, and that is your prime objective. Just make sure that you know how to go about it properly if you are to succeed.

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