As a Las Vegan who practices in the areas of bankruptcy and short sales, I understand and appreciate the non-stop barrage of commercials and advertisements from people and companies promising the moon, and more when it comes to loan modifications. However, with a little bit of research and good old elbow grease you can cut through the junk and find out what is reality.
The majority of loan modifications do not include a principal reduction. I will repeat in bold. The majority of loan modifications do not include a principal reduction. If this is your goal, while not impossible, I would prepare for David v. Goliath.
The reality is that the majority of loan modifications come in three different forms: (1) Lender reduces your interest rate to no lower than 2%; (2) Lender increases the term of your loan to thirty (30) or sometimes forty (40) years from the date you sign the agreement; and (3) the Lender MAY forebear on a portion of the principal, or in layman terms the Lender will not charge interest on a portion of your loan but you will owe whatever the forebear amount is at the time you sell the house or at the end of the term of the new loan. In some cases a Lender may blend these tools to modify your loan.
The goal of any loan modification is to reduce the amount due and owing on the home plus any costs relating to taxes, HOA and insurance to an amount of 31% of your gross income OR to an amount that is affordable to you.
So say for example you have gross income of $6,500/month and your mortgage plus taxes, insurance and HOA is $2,500 month, at an interest rate of 6.25%. Further, the outstanding principal balance of your loan is $400,000. In this situation, the Lender must reduce your monthly mortgage payment plus taxes, insurance and HOA to $2,015 ($6,500 X 31%). So, say taxes, insurance and HOA equal $300/month. Thus, the Lender must be able to change the terms of your loan so that a payment on the principal amount of $400,000 will equal $1,805. Here, this can be accomplished if the Lender reduces your interest to 3.5% and changes the term length of your loan to be thirty (30) years from today.
A successful modification is not always the outcome. Say in the above example the homeowner’s gross income was only $4,200. As such, the Lender must reduce your monthly mortgage payment plus taxes, insurance and HOA to $1,302($4,200 X 31%). Again, the taxes, insurance and HOA equal $300/months. Thus, in this example the Lender must be able to change the terms of your loan so that a payment on the principal amount of $400,000 will equal $1,002. This is simply not possible without either a principal reduction or forbearance on the principal of the outstanding due and owing and Lenders are very reluctant at allowing either of these options.
All is not lost, Chapter 13 bankruptcy may also be able to reduce or eliminate many of your other debts, INCLUDING eliminating your second lien on your house, freeing up funds to pay your mortgage. This is something that no loan modification can do for you. Chapter 13 can stop a foreclosure and give you up to five years to catch up on the missed payments. Many homeowners are able to catch up their missed payments if they are given the time to do so. Loan modification directly with your mortgage company will normally give a matter of months, not years, to spread out the missed payments.
Your decision should be decided knowing all your options. A good attorney can, and will, freely discuss whether workout is a better option for you.
Many debtors choose not to file for Chapter 13 bankruptcy because it requires repayment of at least a portion of their debts. Chapter 7 bankruptcy, another option, wipes out many debts entirely. In some cases, however, Chapter 13 bankruptcy IS the better bankruptcy option. Furthermore, certain debtors don’t get to choose because not everyone is eligible for Chapter 7 bankruptcy leaving Chapter 13 as the only option available. Here are some good reasons to file for Chapter 13:
