Upside Down Mortgage

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A loan modification is a renegotiation of your present loan on a property, e.g. your home. In order to put off a foreclosure due to a default on payment on a property, the lender and borrower have to compromise on the terms of their present agreement. How this situation came about will be discussed by means of an example of an average couple.

Suppose John and Sue took out a 7% mortgage rate on a home they wanted to purchase for $250,000. A couple of years later, as we are witnessing now, the home plummeted in value all the way down to $150,000. To compound the problem, Sue lost her office job and John's hours were curtailed at the factory. John and Sue would like to renegotiate their mortgage down to a lower interest rate, because due to difficult times mortgage rates have come down, and they are unable to pay the mortgage. However, there is a problem. John and Sue are in a situation where they have an upside-down mortgage, meaning they now owe the bank more than the home is worth. A short sale or bankruptcy are other options. Since they love the home or are unable to sell it, another method to resolve the situation is required.

John and Sue's payments have been late to the bank and now they have missed their last two payments, violating their loan agreement. The bank wants the money so it can make another loan. If the bank forecloses on the home, there will be expenses incurred by the bank and in the end when the home is sold by the bank, money might actually be lost. Depending upon the state, the bank must make some attempt at resolving the situation before foreclosure proceedings can be initiated. Perhaps, something can be worked out called a loan modification. John and Sue must meet basic requirements such as losing their jobs.

John and Sue notify the bank and enter into negotiations with the banker. Together they decide on what payment can be reasonably met, approximately 33% of the new income amount for the couple (lost job and hours). In order to meet this lower monthly payment, there are three options available to the bank.

The first option is to lower the 7% mortgage. This will obviously lower monthly payments. The second possibility is to lower the principal payment. The final method is to extend the life of the loan (re-capitalization of missed payments). A combination of all three loan modification methods is also to be considered. The bottom line is that if the bank will do better financially by not foreclosing, only then will they consider a loan modification.

The loan modification will not help your credit rating or FICO scores. The damage to your credit rating will not be as catastrophic as a foreclosure, but anytime there is a problem in meeting debt obligations, for any reason, expect a lower credit rating.

There are companies who deal with loan modification, but often don't bring any results. Often the services cost thousands of dollars which people can't spare. The solution is Do It Yourself Loan Modification. One such kit is 60 minute loan modification. It provides all the forms and teaches you how to grab the lenders attention for best results. Its a must have for people who are struggling to pay their mortgage and are in dire need of help.

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Source - What You Should Know About Loan Modification

Bankruptcy Update III - Spring 2008

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