(In part 2 we go into the nuts and bolts of mortgage loan modification covering what your lender what your lender looks at before modifying your mortgage loan and what your lender requires. If you did not read Part 1 go to How Does Mortgage Loan Modification Work? Part 1)
When Will A Lender Agree To Mortgage Loan Modification?
Lets say your are upside down on your mortgage by $100,000 and you are paying $2500 per month. If you pay $1000 less a month, how long would you have to pay $1000 less a month to equal $100,000? Right, 100 months or 8.5 years.
If your mortgage is upside down by $100,000 the lender will probably lose more, if he forecloses. The more expensive the home, the more the lender loses. They will likely end up discounting the market value by 15%, plus pay the Realtor commissions at 3% on the low side. Lets say the loan balance was $500k, the house was worth $400k and sold for a 15% discount at $340k ($160k loss) plus 3% commission of $10,200 ($170,200 loss) and lets say there was $5k for legal and other costs ($175,200 loss) now we are up to 14.5 years of paying $1000 less a month.
Now Combine Mortgage Loan Modification With Principal Forbearance
Now, to modify the monthly payment to $1500 a month, plus make it attractive to the lender. We use a principal forbearance, by dropping the principal down $100k, re-figure the monthly payments on $400k ($500k-$100k), plus drop the interest rate a few percent. The principal reduction will be due as a balloon payment when the house is sold, refinances or at the end of the loan, with an option to continue the same payments until principal forbearance amount is paid.
I Pay Mortgage Insurance Can't They Do Something?
If you are in a situation where you are behind on mortgage payments and the lender is requiring repayment before they will begin mortgage renegotiation this is an excellent time to bring in your Mortgage Insurance Company.
You have been paying for all that insurance over the years now it is time to benefit from it. Usually you can arrange to have your mortgage insurance company give you a loan to cover the costs of the delinquent payments and often your lender will help to arrange it.
This solution is much cheaper for both the lender and the mortgage insurance company, especially if you have an upside down mortgage.
The insurance company will end up paying the difference between the discounted foreclosure sale price and the loan balance.
If you have an upside down mortgage this can be a very large amount of money for the insurance company. Loaning you the money for the missed payments is much cheaper than paying out $100k or more after a mortgage foreclosure sale.
What Else Should You Modify?
Remember you can restructure any loan term if the lender agrees. So do not forget all those late fees and penalties. Lets just cancel those 100%. That one is easy with the lender if they are convinced to do a loan modification.
So How Does Mortgage Loan Modification Work?
Any way you want, but there are some points that have to happen first.
You must have a valid financial hardship. If you do not, your lender will not agree to restructure you loan. They are not into losing money if they do not have to.
You must convince your lender, with evidence, how you will save them money by paying them less.
You must show your lender how you can afford the new modified payment you are asking for and prove it.
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