Stop Foreclosure Answer

It is common for those of us who work with people facing foreclosure to forget that many people may not understand what some of the terms we use mean.  At times they may be afraid to ask because they feel that they should know.

Well, let’s clarify one of those terms today.

If you are facing foreclosure, one term that you will hear on a regular basis is Loan Modification.  What is a Loan Modification?

A Loan Modification simply is where your mortgage company and you agree to modify the terms of your mortgage.  Normally in a modification the monthly payment is reduced.  Your mortgage company will do this only if they and the investor thought that by reducing your monthly payment they would make more money than they would if they foreclosed on your home.

Let’s start at the beginning.

When you got your mortgage, your mortgage company loaned you a certain amount of money at a specified interest rate.  You agreed to repay the money they lent you by making monthly payments over a specified period of time until all the money and the interest due was paid.

Initially you had no problem making the monthly payments.  However, a crisis hit – either you lost your job or a death or a divorce occurred or a medical crisis came up or some other financial crisis developed – and you no longer can continue to make the monthly mortgage payment that you agreed to pay.  You start to miss payments.

Your mortgage company notifies you that you have violated the terms of your agreement.  They start to foreclose on your property.  The law requires them to do this.  However, they don’t want to because they and the investor will lose money in the process.  They would prefer to help you find a way to catch up with your payments and save your home.

There are several different ways they can do this.  The most common one is to modify your mortgage.  Here they will look at the financial challenges you are having and your income.  They will figure out how much of a monthly payment you can make.

If they determine that you can consistently make that lower monthly mortgage payment for the duration of your mortgage and that will result in more money for them and the investor, they will let you know that they are willing to modify your mortgage in that manner.  You have the option of agreeing to that or trying to resolve your problem in another manner.

How does your mortgage company determine how much they will lower your monthly payment?  They look at your income and your debts and figure out how much you can afford to pay.

Until last fall there was no fixed formula to do this.  Each mortgage company figured out on their own how much they would be willing to reduce a mortgage payment.

Last fall the federal government stepped in.  When Indy Mac, a bank which had originated quite a few mortgages, became insolvent, the federal government took them over.  At that time they started to reduce the mortgage payments for people facing foreclosure to 38% of their gross income.

In March of this year the Obama Administration announced their Making Home Affordable Modification Program.  In that program, the monthly mortgage payment is reduced to 31% of a person’s income.

By reducing a mortgage payment to 38% and 31% of income, the federal government feels that most people facing foreclosure will be able to make their monthly payment consistently and save their homes.

Most times these modifications are for fixed periods until people facing foreclosure get back on their feet again.  In the Making Home Affordable Modification Program, the payments are reduced for 5 years.  Then the payments start to rise to a fixed amount set at the time the modification is agreed to.

Some time, the mortgage is increased to 40 years so that the mortgage company and the investor can recover some of the money they stand to lose by reducing the monthly mortgage payment.

A modification may or may not be the best way for you to proceed.  You should look at all options open to you.  I also recommend that rather deciding on your own consult a lawyer or an expert in helping people facing foreclosure.  They will be able to give you the advice you need on how to save your home.

Much Success,

Mark Elkins