Don't lose hope just yet even though you may be currently having a tough time making your mortgage payments because of some financial issues. Instead of avoiding your lender, approach him. Most lenders are willing to work with borrowers and may even help them in modifying their loans so that they can afford to pay the monthly payments. Still, once you go through the process of loan modification, you must ensure that the terms specified are doable and satisfactory to both parties, the lender and you - the borrower.
1The Goals Of A Loan Modification
When a loan is modified, a lender is focused on ensuring that a borrower will pay back the total mortgage someday while also being able to make the highest payments per month for the time being. During loan modification, your goal as a borrower is to reduce your monthly payments. Compromise is essential, and the best resolution is one that benefits you and your lender: the lender should still profit while minimizing losses, while you should be able to continue residing in your home without feeling like your entire life is held captive by your mortgage. When it comes to loan modification, take note that both parties, you and your lender, will probably have different concepts about which way is fair.
2Considerations For A Fair Deal
A lot of people get the idea that the re-amortization of their mortgage with a 3% interest rate is the best and most favorable means to reduce the balance on their properties' value. But, lenders typically have a different idea about what makes a fair deal. Here's an ideal deal in the mind of a lender: the interest rate could be dropped to 4% for three years, which capitalizes on fees, penalties, and other deficiencies, and that reduction is followed by incremental increases based on the market rate. Hence, in a loan modification proceedings, a fair deal must be something in between, something satisfactory to both parties.
3The Federal's Fair Deal Standards
Fortunately, there are rules regarding what's equitable and what strategy can still allow a borrower to afford his monthly mortgage, and the U.S. Treasury Department imposes such regulations. Through the Making Home Affordable website, any person can read about what a regular and affordable mortgage payment plan is like, per federal government rules. Fair and ideal payment for a mortgage loan uses a baseline of 31%, according to sources.
For you to find out what the federal government considers as fair regarding your home and loan, check out the source mentioned above. Such regulations apply to all loans that are classified under the MHA program, which includes Fannie Mae and Freddie Mac loans, VA and FHA loans, as well as loans that are owned by certain lenders. Nevertheless, it is the Treasury Department who finalizes what is fair or not utilizing the debt-to-income ratio. The main goal still remains, which is to help homeowners in obtaining affordable properties.
4Essential Criteria For Loan Modification
It is crucial for a loan modification to possess certain criteria. For example, the front-end debt-to-income ratio must be about 31% or less, and the mortgage payment, including insurance, taxes, and others, should not be greater than 31% of a borrower's monthly gross income. It's also important for the back-end debt-to-income ratio to remain at 55% or even less. The total monthly payment, which typically includes credit card, mortgage, car, and other fees, should be 55% or less than a person's gross monthly income. In such cases, debt counseling may even be required.
Owner-occupied homes can also follow certain types of MHA programs. Through MHA plans, homeowners can obtain around 31% DTI ratio by lowering the interest rate of the mortgage, which results in a reduced opening DTI. The Treasury works with the lender to further reduce monthly fees to get to the required 31% front-end DTI. To achieve this target, a lender may have to further lower interest rates, give extensions regarding a mortgage plan's term, and also lower the total principal balance.
5Making Loan Payments More Affordable
It is helpful to ask a lender to consider other ways to lower the interest rate. However, if that fails to work in making regular payments more affordable for the borrower, the next strategy to try out is to extend the term of the loan. In case term extension and interest rate reduction still fail to work, it may be helpful to reduce the principal amount.
Through this overall plan, a lender will likely deviate from the general guidelines to help a borrower afford his monthly payments, and thus offer financial relief. Most things are acceptable as long as the 31% front-end DTI ratio is achieved. Still, there is another challenge after such issues are resolved, and this is keeping the back-end DTI ratio at 55% or even lower.
6The Need For HUD Credit Counselors
When the back-end DTI of homeowners is greater than 55%, they must sign a document indicating their agreement to work with an approved credit counselor from the HUD or U.S. Department of House and Urban Development. After meeting with the HUD representative, any changes on the loan agreement won't take effect until after a homeowner presents the signed paper that states his willingness to go through credit counseling. It is, however, possible for the guidelines set by the MHA to change during certain times, and so this may not apply to all lenders, investors, and services. Through the MHA, fairness is evaluated in a different way as regards lenders. In general, the MHA requires program participants, or lenders, to use the net present value test when assessing every mortgage loan that may likely go on default, or those loans that are at least 60 days delinquent, which is determined by the MBA or Mortgage Bankers Association delinquency computation.
7The NPV Test
The NPV (net present value) test includes several complicated formulas that help in evaluating property value, cure rate, REA stigma discount, which is the stigma value that is linked to repossessed homes, liquidation value, re-default rate, depreciation, selling costs, and marketing. The NPV tool, which is provided by the Treasury Department, is used to check if a mortgage is applicable, and it also helps lenders to input details into the system so that they too can check what mortgage plans passed the test. In general, a lender who takes part in this type of MHA program will only be obligated to modify mortgage in case the NPV test proves that the cost for him to adjust is less than if he opted to foreclose. Although a lender can still decide to modify a loan that fails the NPV test, the lender will only be required for a loan modification if it passes the NPV evaluation.
A loan modification is a challenging and complicated process. Some individuals even hire real estate lawyers so that they can figure things out and find better solutions to their problems. As for you, in case you believe that you need to modify your loan because of current financial issues, you may have a hard time getting enough cash for a lawyer. In such cases, what you can do is to research the topic so that you'll know more about loan modification and determine which terms are fair to you and your lender. Hopefully, all goes well for you.