December 16th, 2008 11:34 PM by Sam Kader
The goals of loan modification are as follows:
a) Collect all or as much as possible of the original loan amount.
b) Create a payment that is affordable to the borrower.
An affordable payment usually is defined as somewhere between 31% to 41% of gross monthly income.
Common type of loan modifications are:
a) A temporary or permanent interest rate reduction.
b) An extended payback period to 40 years.
c) A deferral of principal (usually at zero interest).
Principal reduction or forgiveness of debt in location where property value depreciates significantly is rarely given. The process is to prevent foreclosure and not creating investment opportunities.
The first step of loan modification is to call the lender. Be ready to proof financial hardship such as prolonged illness, disability, temporary unemployment, divorce or death of a spouse and be able to write a hardship letter that explains the situations. Contact local nonprofit mortgage counseling agency that's certified by the U.S Department of Housing and Urban Development for assistance in preparing your loan modification.
Forewarned that lenders are only agreeing to the smallest-possible changes that have provided only temporary relief for the borrowers. Many local services do not have the contractual right to lower the terms dramatically and many of the investors who hold the notes are reluctant to discount the assets that much.