In part 1, we explored the recent developments on Loan Modifications. Many people are heading down the foreclosure path when they could have worked out a modification with their lender. How do you know if a loan modification is the ‘right’ path for you or your clients? The typical homeowner seeking a loan modification has an adjustable rate mortgage that has metaphorically exploded causing prohibitive mortgage payments that are now delinquent. The process of loan modification is not easy. It takes gumption, resolve and a bit of salesmanship to get the job done. But if you get your loan mod done you’ll receive a loan at a competitive rate that is fixed and secure for usually 30 years.
A loan modification request will turn on two things. First, can the homeowner document a hardship? Usual examples are divorce or separation, military service, disability, injury and loss of job or income. Each situation is unique. Second, and perhaps more importantly, can the homeowner afford the modified loan payment? Affordability turns on one key factor: income. Therefore it is very important that the homeowner know how a lender will calculate “income” in a loan modification. Interestingly, the income calculations used to qualify for a traditional loan are different from those used in a loan modification.
In a loan modification, most lenders focus on the homeowner’s total documentable household income. As such, you can count income from almost any source, including ‘cash’ or ‘under the table income’ so long as the homeowner can prove the income. A spouse’s documentable income counts, even if they were not on the original loan. 1099s, bank statements showing deposits are typical examples of proof.
Loan modification requests are as much art as science. The homeowner must separate from his or her old loan and qualify for a new one. It can sound both impossible and complicated and it is at first but there are important strategies for effectively demonstrating the appropriateness of a loan modification. The first step is the simplest: contact the lender and explain that a loan modification is desired. If a homeowner still feels overwhelmed, it might be appropriate to seek the help of a lawyer. Often, a lender will answer a lawyer’s calls and letters long before they would respond to the homeowner.