Examples And Explanation Of The Mortgage Modification Procedure

By Author: Nick Bankruptcy
Total Articles: 197
Comment this article

If you are up against foreclosure, or have a house payment that is too high, then you've probably thought about getting a mortgage modification. A mortgage modification is when the terms of a loan are permanently changed to allow a lower payment.

The altered payment is delivered by either reducing the interest rate, stretching out the term, or lowering the balance to be more in line with the current market value. In most cases, a combination of several of these methods is used to reduce the mortgage payment. There are other alternative options to reduce a payment with a modification too, but they all center around the term of the mortgage, the payoff, and/or the interest rate.

Here is an uncomplicated example of how a mortgage modification can lessen the payment, using each of the three options above.

Method #1 - Lowering the interest rate

Lets assume the payoff balance is $200,000 and the current interest rate is 7.75% and the payment amount is $1,750. Lets also assume this person has 20 years left on a 30 year loan. The homeowner can no longer afford this payment because of a job loss. They ...
... can afford a $1,250 payment, so the lender agrees to lower the interest rate to a fixed rate of 4.25% for the remaining life of the mortgage. This will give them a payment of $1,240, without the need to extend the term of the loan or lower the payoff amount..

Method #2 - Extending the term of the loan

Lets use the same example above, only this time, we'll assume the homeowner can afford a $1,500 payment. The loan amount will still be $200K and the interest rate will still be 7.75%. But in this situation, the bank was not willing to lower the interest rate. This happens quite often, because the investors on the loan are not willing to accept a reduced rate. In this situation, extending the length of the mortgage will make the payment affordable again and the investors will keep their 7.75% interest rate. The $200,000 balance is re-amortized over a 30 year period to get a lower payment of $1,430. Everyone is satisfied because the foreclosure was prevented and the new payment is affordable.

Method #3 - Lowering the payoff amount

In order for a payoff amount to be lowered, the value of the property must be less than the payoff amount. In some cases, banks will reduce the payoff amount without this stipulation, but it's unlikely. To get the payoff amount lowered, you must provide evidence to the servicer that foreclosing on the property will cost more than reducing the balance to make the loan affordable again.

In this situation, we'll assume the home's current market value has been determined at $179,000, but the amount owed is still $200,000. If the servicer forecloses on the property and tried to re-list it, their estimated loses will be 30% of the home's value. So after foreclosing on the property and re-selling, they will receive about $125,000, if they are lucky. Most servicers expect to lose 30%-60% on every foreclosure property, so this amount is being very generous.

By allowing the existing owner to keep the property, with a new affordable payment, they can continue servicing the loan and collect the full value, plus interest. This is a much better option for the lender, assuming the new payment is affordable. By reducing the payoff to $179,000 and keeping the same interest rate and 20 year term, the new payment is $1,470, which now fits into the homeowners $1,500 budget.

Applying All Three Solutions At The Same Time

When dealing with my clients, I generally try to get the lowest possible payment, which would mean reducing the interest rate and payoff, while extending the loan to 30 years. By negotiating all of these items, a lowered payment of $880 could be fixed for the remaining term of the mortgage. An educated negotiator knows exactly how to get the lowest possible payment in the shortest amount of time.

Negotiating with investors is all a matter of having the right knowledge and being prepared. It's not something most homeowners can do on their own, regardless of what many people may think. A mortgage modification is the answer to saving and affording your property. Negotiating your case incorrectly can not only cost $1000's but it can cost you your home!

In the example above, the difference between a good modification and a bad modification adds up to over $100,000 in extra payments over the life of the mortgage! So even if you are successful with a modification without help, it could still cost you over $100,000! If you don't understand the modification process, or don't have confidence in your ability to get an affordable payment, make sure you employ someone to help immediately. There is no time for "gaining knowledge from your mistakes" when a single error could cost you your home!
Nick publishes articles about filing chapter 7 bankruptcy and chapter 13. He also has a complete website with bankruptcy guidance and information. Where you can find out about the bankruptcy method and if you will be qualified to file at http://www.bankruptcychapter7and13.com/