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How a Loan Modification May Help Reduce Your Monthly Mortgage Payments

How a Loan Modification May Help Reduce Your Monthly Mortgage Payments For homeowners struggling to keep up with their mortgage payments,there are programs available to help avoid foreclosure. However, because these programs are legal agreements, it is prudent for borrowers to consult a lawyer. One viable alternative to foreclosure is a loan-modification program that is an adjustment to the terms of the existing mortgage. Loan modification is designed to provide either temporary or permanent financial relief by reducing the amount of the monthly payments via a reduction in the principle, interest rate or by extending the term of the loan.

Loan-Modification Options

There are several forms of loan modification, with some being better than others. However, the lender that holds the mortgage may not provide all the available loan-modification types.

The full list of options include:

• Principal Reduction: Lenders are sometimes willing to eliminate a portion of the debt, requiring the borrower to repay less than the amount originally borrowed. This will obviously reduce the monthly payments. However, most lenders are usually very reluctant to reduce the loan principal and this option is normally the hardest option to qualify for. Additionally, borrowers will want to consult a tax attorney as they could end up owing taxes on any forgiven debt.

• Interest Reduction: Lenders will often times be willing to reduce the interest rates, that will in turn reduce the monthly payments. However, the details must be carefully examined as sometimes the rate reductions are temporary and will adjust back up at a specified date.

• Loan-Term Extension: Commonly referred to as "re-amortization,” this option provides borrowers with more years to pay of the loan, again reducing the amount of the monthly payment. The catch here is the borrower may end up paying more money in the long run as a longer term means more interest being paid.

• Loan Conversion: This changes an adjustable-rate mortgage to a fixed-rate loan to prevent the payment from increasing when the interest rate adjusts upwards.

• Payment Postponement: The lender may allow the borrower to skip a few payments, often called as a "forbearance agreement." However, the payments are not forgiven, but added on to the end of the mortgage term and interest will typically still accrue. To fully understand all these options, borrowers may want to consult with one of our seasoned attorneys.

Government Loan-Modification Options

Government loans, such as VA, FHA and USDA loans, offer loan-modification relief. Borrowers should contact their lender or a HUD-approved counselor for information. The Fannie Mae Mortgage Help Network may be able to help with other types of loans. The federal government offers programs, like the Home Affordable Modification Program, or HAMP, that are designed to aid struggling homeowners avoid foreclosure. While both HAMP and the Home Affordable Refinance Program, or HARP, have now expired, in 2016 and 2018 respectively, HARP has been replaced with the “High Loan-to-Value Refinance Option” through Fannie Mae and the “Enhanced Relief Refinance Program” through Freddie Mac.

Why Lenders Modify Loans

Most often, a loan-modification program is more financially prudent for the lender than other legal options, such as:

• Foreclosure.

• Short sale.

• Hiring collection agencies.

• Attempting wage garnishment and bank levies.

• Writing off a bad loan as a loss.

• Loss of the ability to recover funds if the borrower decides to declare bankruptcy.

All of these options cost the lender money while providing no guarantee they will recover their money.

Qualifying for a Loan Modification

Borrowers should begin by informing their lender about their financial situation. Requirements will vary by lender, however, the lender will require the details about the borrower's financial problems to evaluate a loan-modification request. Information the lender may require includes:

• An income statement declaring all sources of income.

• An expense report detailing how much money is spent every month and where the money goes.

• Documents that verify the current financial situation, including paycheck stubs, bank statements and tax returns.

• A hardship letter detailing the situation that led to becoming delinquent on mortgage payments and a plan to rectified the situation with supporting documentation.

• IRS Form 4506-T that grants the lender authority to access the borrower’s personal IRS tax information. Typically needed only if the borrower can’t provide their own tax records.

Processing a loan-modification request can take several weeks, so borrowers should carefully follow their lender’s advice during this time.

Beware of Loan Modification Scams

Regrettably, homeowners in financial distress are magnets for con artists, so borrowers should be very careful of promises from third parties. To be safe, homeowners should work directly with their lender, whenever possible.

Traditional Refinancing Option

Modification is usually an option for borrowers who are not able to obtain a traditional refinance option. However, it is sometimes possible to replace an existing mortgage with a new mortgage that will have a lower interest rate and payments.

Bankruptcy is Always a Final Option

If all else fails, filing for Chapter 13 bankruptcy may be a last-resort option. Chapter 13 is different from Chapter 7 Bankruptcy where the court takes control of your non-exempt assets. With Chapter 13 borrowers enter into a court-approved plan to pay off debts, typically within a five-year period. However, not every one qualifies for Chapter 13 bankruptcy and borrowers should consult a bankruptcy attorney.

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