Las Vegans are subjected to a non-stop barrage of commercials and advertisements from people and companies promising principal reductions through loan modifications. However, the majority of loan modifications do not include a principal reduction.
The majority of loan modifications come in three different forms:
- The lender reduces your interest rate to no lower than 2%;
- The lender increases the term of your loan to thirty (30) or sometimes forty (40) years from the date you sign the agreement; and
- The lender MAY forbear on a portion of the principal or, in layman’s terms, the lender will not charge interest on a portion of the loan. However, the borrower will owe whatever the forbear amount is at the time the house sells or at the end of the term of the new loan. In some cases a lender may blend these tools to modify your loan.
The goal of any loan modification is to reduce the amount due and owing on the home plus any costs relating to taxes, HOA, and insurance to an amount of 31% of your gross income OR to an amount that is affordable to you.
For example, a borrower’s gross income is $6,500 per month and the mortgage plus taxes, insurance, and HOA is $2,500 month at an interest rate of 6.25%. The outstanding principal balance of the loan is $400,000. Therefore, the lender must reduce the monthly mortgage payment plus taxes, insurance, and HOA to $2,015 ($6,500 X 31%). If taxes, insurance, and HOA equal $300 per month then the lender must change the terms of the loan so that a payment on the principal amount of $400,000 will equal $1,715. This can be accomplished if the lender reduces the interest to 3.5% and changes the term length of the loan to thirty (30) years from today.
A successful modification is not always the outcome. If, in the above example, the homeowner’s gross income was only $4,200, the lender would reduce the monthly mortgage payment plus taxes, insurance and HOA to $1,302 ($4,200 X 31%). Again, the taxes, insurance and HOA equal $300 per month. Therefore, the lender must change the terms of the loan so that a payment on the principal amount of $400,000 will equal $1,002. These payment adjustments are not possible without either a principal reduction or forbearance on the principal of the outstanding due and owing. Lenders are very reluctant to allow either of these options.
Declaring chapter 13 bankruptcy may also be able to reduce or eliminate many other debts, including a second lien on a property which is something no loan modification can do. Chapter 13 can stop a foreclosure and allow a borrower up to five years to catch up on the missed payments. Many homeowners are able to catch up on their missed payments if they are given the time to do so. Modifying a loan directly with a mortgage company will normally allow a matter of months, not years, to spread out the missed payments.
Knowing all the options makes for a more informed decision. A good attorney can, and will, freely discuss which option is a better solution for you.
Randy M. Creighton, Esq.
