Who Qualifies for a Loan Modification?

Although this kit will help many homeowners who are in trouble, there are certain requirements set forth by lenders that determine eligibility.

Behind in Payments: If you are currently behind in payments, you are eligible for a loan modification.

Upside down: If you owe more than your home is worth you are eligble.

Income: You must be able to show the ability to make monthly payments if the bank agrees to modify your loan; otherwise it will not make sense for the lender to adjust your loan.

Debt to Income Ratio: Depending on the lender, your new payment must only be 31%-40% of your gross monthly income. These guidelines, however, can vary significantly from lender to lender and are subject to change.

High Interest Rate: If you are in an adjustable rate mortgage (ARM) or a high interest fixed rate mortgage( 7.5% or higher), then you are a strong candidate for a modification.

Hardship: If you’ve experienced a recent hardship, then you’re certainly eligible for a loan modification.
Some examples of hardship include loss of job, illness, or divorce.

Why Loan Modifications Can Save Your Home: Loan Modifications Explained

So, you're upside down on your home mortgage and behind on your payments...what now? A loan modification, an adjustment in the rate and terms of your loan, can save you thousands of dollars and most importantly, your home! With adjustable rates causing foreclosures at an all time high, banks are adjusting mortgages in order to help you, the home-owner.

A loan modification is when a lender modifies your current mortgage to work with you because of a hardship. The purpose is to make your loan more affordable and avoid a foreclosure. Usually it is in the form of a rate reduction but sometimes it can be a principle reduction. The length of some loans may also be modified — for example, changing a 15 year note to a 30 year note. It may also include adding delinquent payments to the balance of your loan. In a nutshell, a loan modification changes the terms of your loan without refinancing.

The process of loan modifications have been around for years, but only recently have become into the forefront of the real estate world. An emerging consensus suggests that a streamlined loan modification approach is not only feasible, but that it can reduce the cost and complexity of restructuring.

Beginning in 2007 the mortgage industry nearly collapsed. Large numbers of lenders went out of business and the rest were forced to eliminate all of the loan programs that were most prone to foreclosure. These foreclosures were mostly caused by the packaging and selling of subprime and other risky mortgages. The transfer of ownership from mortgage lender to third party investor proved to be disastrous. Lenders wrote risky loans and sold them without being directly affected by the borrower’s inability to pay. This practice prompted mortgage lenders to lower the requirements of mortgage approval to the lowest levels in history. This resulted in millions of unqualified people obtaining mortgages. Lenders sold pools of these loans to investment firms who packaged and resold them to the public in the form of bond issues. When the homeowners started to default on their mortgages and the bonds began to be considered too risky for investment, the investment houses could no longer sell the bonds. When the bonds stopped selling, the investment companies stopped purchasing newly originated mortgages. Lenders being unable to sell off the new mortgages, coupled with investment firms demanding that lenders buy back the bad loans previously sold, halted the regeneration of capital necessary to maintain the business of lending money. Well over 200 mortgage companies were forced to close or go bankrupt. This crisis was dubbed the “Credit Crunch" and the subprime mortgage crisis.

With the surviving lenders faced with mounting losses from foreclosures, lenders were forced to tighten lending guidelines. This means people that were able to previously qualify for loans are now unable to do so. Many of these people are in risky subprime, adjustable rate and negative amortization loans are falling victim to dramatic payment increases. Without the ability to refinance out of these loans, the only answer for many is default and foreclosure or loss mitigation.

Loss mitigation is used to describe a third party helping a homeowner, a division within a bank that mitigates the loss of the bank, or a firm that handles the process of negotiation between a homeowner and the homeowner's lender. A lender's loss mitigation department works to negotiate mortgage terms for a homeowner that will prevent foreclosure.

Banks are typically willing to offer a solution to avoid the costly legal fees associated with the foreclosure process. This is where FMB can come in and aid the homeowner.