For the most part, you have a couple options depending on your lender. These are outlined below.
Almost every lender has an in-house mortgage modification program. This is simply your lenders own program that is approved under their own guidelines. Every lender is different, so every in-house program is a little different as well. They are often very similar to government programs described below. Most people apply for a government program with their lender and if that is rejected, apply for the in-house loan program.
There are also a government sponsored loan modification programs. These guidelines were set by government agencies and are used by many lenders, but not all participate.
Watch the video to your right if you are thinking of a government program or have been offered a “trial” loan modification. It is a great eye opener for homeowners.
Clearly, you can tell from this video that the banks are not always on your side. Be very wary of any home modification program you are approved for by your lender, especially of ones that include “trial” payments. It is always a good idea to have an attorney review your agreement before you sign it if you are doing this on your own.
With the government programs, if you qualify your monthly payments are reduced to 31% of your monthly income. This is accomplished by reducing your interest rate as low as 2%, extending the length of your loan and reducing your principal balance.
The government programs are the most sought after loan modification programs available. For those who do not qualify for these programs (for example your mortgage payment is already less than 31% of your monthly income), an in house lender option is usually the next step to take.
Now, while some people were affected negatively in the above video, there are many thousands of people who have been approved and have modified their mortgages. Here are some of the programs they have personally used:
Term Extension Loan Modification Program
With this kind of modification, you are asking for “more time” to repay your loan. With a longer term to pay…you would also have a lower monthly payment. The length of the extension cannot be any longer than your current payment term. So if you had 15 years to pay off your mortgage..you would be allowed no more than an additional 15 years.
Reduced Interest Rate Modification
With this kind of mortgage modification, the lender will reduce the interest rate for the remainder of your loan. This will automatically result in a lower monthly payment. Remember this will only reduce the interest not the principle on your loan.
Step Rate Home Modification Programs
Unlike the reduced interest program which extends the life of your loan…the step rate loan begins with a reduced interest rate and gradually returns to your current rate over a short period of time. So, if you are certain that you will be able to get back on your feet financially within a few years…this may be the right program for you. But it’s important to really take a hard look at your finances before taking this route. Many homeowners need a modification because they started off with a step rate loan, so carefully consider this option before you agree to it.
The rate reduction is only good for a few years. After that…you will be back to making the same monthly payments you had before the step rate modification.
Of course, your lender can also decide to use a combination of any of the above mentioned programs to help you.
Principal reductions are a pretty rare happening. B of A has started mailing out principal reduction offer letters to thousands of homeowners as a result of a settlement. It is expected that other lender will also start to participate in the program if it is successful. Check out this blog post to learn more.
The goal of a loan modification program is to help homeowners afford their payments and this can usually be accomplished with a interest rate reduction or an extension of your terms. For example, taking a 30 year mortgage and extending it to a 40 year mortgage.
The only negative aspect to all of this is that most lenders reject a large majority of loan modification programs that are proposed to them by homeowners. To combat this, you may want to use a loan modification company to assist you in getting approved. Many companies will not charge you anything until your modification is approved. Watch the video on the top right of this page and see how difficult it can be to work with your lender…
For questions about your current options (there are many!) just call 888-766-3693.
Click here to read reviews of no upfront fee loan modification companies who can assist you and help you get you approved!