There has been lots of press on the topic of Loan Modification. You can negotiate with your bank to modify your loan yourself or by using a third party expert negotiator or law firm. The government has also now gotten involved and set up a special program to help consumers modify their loans but not everyone qualifies for the government’s bailout as part of the government loan modification program. To see if you quality you need to do some basis calculations. Read through our Loan Modification Calculator examples to see if you qualify for a government bailout or loan modification as part of Obama’s loan modification plan. If you do this is a great way to manage your debt and get back on your feet.

Here’s the basic criteria that our loan modification calculator looks at for seeing if you qualify for a government bailout:

To qualify for the government bailout loan modification program you first need to be in a financially distressed situation.

1. You need to have a financial hardship. Take a look at our article on tip to writing a hardship letter as well as sample hardship letters.
2. You have to have little or no money in the bank available to you.
3. Your loan is under the conforming limit in your area.
4. Your loan to value of your home is near or above your current loan amount.

However ….

5.   You need to have some income coming in. It is okay if you have lost some of your income but you need to be able to pay your new mortgage pavements.

If you meet these criteria then the bank look at doing two things:

- The bank will look at reducing your interest rate. To qualify for the government bailout program the bank can lower your interest rate down to 2%. If you already have a low interest rate this may not help.
- The bank will additionally look at stretching your amortization to 40 years.

6.   After adjusting your interest rate and or your term of your loan, the bank will then look to see if you qualify for the government sponsored bailout loan modification. To qualify for the bailout loan your new payment that is calculated must be not more than 31% of your gross income after your principle, interest, taxes, insurance and association dues are considered.

Here are a few examples from our loan modification calculator:

Loan Modification Calculator - Calculation 1
Your income is: 5,000 per month
Your current interest rate is: 8%
Your current loan term is: 30 years
Your current loan amount is: $800,000
Your Tax, Insurance & Ass Fees: $9,000/yr
You have a Hardship: Yes
***** In Bailout Calculation 1: You DO NOT qualify because your loan is over the limit of a conforming loan.

Loan Modification Calculator - Calculation 2
Your income is: 3,000 per month
Your current interest rate is: 8%
Your current loan term is: 30 years
Your current loan amount is: $400,000
Your Tax, Insurance & Ass Fees: $5,000/yr
You have a Hardship: Yes
***** In Bailout Calculation 2: You DO NOT qualify because even if the bank drops your interest rate to 2% and stretches your loan to 40 yrs, your payments on your loan are $1,211. If you add to that your tax, insurance and association fees you are now at $1,628 per month. Unfortunately that is 54% of your monthly income so you do not qualify for the government bail out program.

Loan Modification Calculator - Calculation 3
Your income is: 6,000 per month
Your current interest rate is: 6%
Your current loan term is: 25 years
Your current loan amount is: $400,000
Your Tax, Insurance & Ass Fees: $5,000/yr
You have a Hardship: Yes
***** In Bailout Calculation 3: You DO Qualify because if the bank drops your interest rate to 2% and stretches your loan to 40 yrs, your payments on your loan are $1,211. If you add to that your tax, insurance and association fees you are now at $1,628 per month. This is 27% of your monthly income so YOU DO qualify for the government bail out program. Likely the bank will not drop your rate to 2% in this case since they do not need to have you qualify.

If you qualify some of the other benefits to the government’s bailout program are:

1. Once the program is in place your loan will not change rate for 5yrs and even then it can only adjust 1% per year for a maximum of 5% points above your start rate.
2. If you are on time with your payments for 5 years, you get a one time reduction in your principle of $5,000 at that time.

Other Relevant Articles:

• How to use loan modification calculators

Description: This article describes the pros and cons of short sales and loan modifications. It offers some useful tips for deciding which would be the best option for you.

When you agree to enter into a mortgage on a home, you are agreeing to abide by specific terms set out in a loan agreement. You agree to a payment schedule and a payment amount, based on the amount of the mortgage loan and the interest rate offered by the mortgage company. But what are your options when you find that you can no longer abide by the terms of the agreement? For whatever reason, if you find yourself unable to meet your mortgage payments, there are several options available.

Loan Modification
The first thing you should look into would be a loan modification. A loan modification is simply the process by which the terms of the original mortgage agreement are changed. In a mortgage agreement, the mortgage lender holds a lien on the property until the mortgage is paid off. Loan modifications that benefit the borrower are typically changes in the interest rate, or to change from a variable to a fixed interest rate. Changes could be made in the accrual of late fees and penalties or could even be in the length of the loan. A fifteen-year mortgage could be lengthened to a thirty-year mortgage. The borrower can be in default, in bankruptcy or in foreclosure when these loan modifications take place. The modifications take place at the discretion of the mortgage lender. Often, it is their financial best interest to modify the terms of the loan because it would ensure that the buyer would continue to pay the mortgage, which would be more valuable to the lender than foreclosure.

Certain criteria must be met in order for a loan modification to be considered. Those criteria can change, so it’s good to check with your lender or with your attorney to find out if you qualify for a loan modification. Loan modification is a good option for people who are basically financially stable, but who need the mortgage to be restructured in order to keep current.

Short Sale
A short sale, in real estate, occurs when the property sells for less money that the borrower owes on the home. A short sale is usually done to avoid foreclosure on a property, something a mortgage lender usually wants to avoid. In a short sale, the mortgage lender agrees to discount a loan balance because of some financial hardship on the part of the borrower. Most of the time, the mortgage lender agrees to take the entire proceeds from the sale of the home as payment on the mortgage, agreeing to forgive the outstanding difference owed by the borrower. This usually occurs when the borrower cannot afford to pay the mortgage anymore and the bank does not want to foreclose.

What’s best for you?
• Saving your home and avoiding foreclosure is the primary goal in deciding what the next step is for you and your family. If you are experiencing a temporary

Here is a specific example of a hardship letter you could use for a loan modification if you fall behind in your payments. For a little more detail on putting a hardship letter together see: Tips on How to Write a Hardship Letter for a Loan Modification or Short Sale.

A hardship letter is a letter written to your bank or mortgage company telling them why you can no longer afford to make the payments on your home. This letter describes your hardships and specifically what has happened that caused you to fall behind.

Based on the current credit environment, hardship letters are being used as a tool to help homeowners avoid foreclosure on their homes. The result can be a modification of the loan or the acceptance of a real-estate short sale by the bank.

Sample Hardship Letter for Loan Modification:

(Date)

To Whom It May Concern:

Our family purchased our home in (Date).

Since that time, a number of unfortunate circumstances have impacted us. These circumstances combined with the rising costs of food and the economic slow down have caused us to be delinquent on our mortgage payments. We love our home and want to stay in it and would like you to consider working with us to modify our loan.

In the last few months our financial situation has gotten difficult. Specifically, (This is where you need to explain the specifics of your situation. Example: Our adjustable interest rate went up and our payments increased from $x to $y, lost one of our jobs, medical emergency….). As a result of these unfortunate circumstances we can no longer afford our mortgage payments.

We feel that if we could get our loan modified, we would be in a better situation and could make our payments. We would appreciate if you can work with us to lower our payment so we can keep our home.

We have enclosed copies of our financial statements.

(You would attach copies of proof of income {paycheck stubs…}, Proof of hardship {late notices you received recently}, Bank Statements for last 2 months, past 2 years income tax return)

We appreciate all of your help as our family goes through these hardships.

Sincerely,

Home Owner Name(s) ___________________

Signature_____________________

Loan # ______________________

Address______________________

Phone________________________

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• New programs help homeowners, but are too late for some (seattletimes.nwsource.com)

If you’re having trouble keeping up with your mortgage payments, then perhaps a mortgage loan modification might be the answer. A loan modification can reduce your monthly mortgage payments and help you keep current with your mortgage based upon your financial means. However, when you talk to your bank or mortgage lender about a modification, are your or the bank’s best interest involved?

The bottom line is the answer to this question. The bottom line for the lender is to make income in the form of interest on money they lend to others. If a borrower fails to make payments as agreed in the mortgage terms, then the lender may have no choice but to foreclose on the home and recoup their losses on the resale of the home. Usually a foreclosure is a great expense to the lender in attorney’s fees, filing fees, and losses incurred while holding the property for sale. All efforts to avoid foreclosure should be taken by the lender, including modifying the loan in extreme cases to help a borrower repay the loan.

Getting Professional Modification Help

Although foreclosures are not desired by lenders, they still have many strict guidelines in making and modifying mortgages to suit the owners and investors of the lending company. Subsequently, it may appear ironic that lenders want to avoid foreclosure, but are also not willing to work with borrowers to negotiate a reasonable settlement for both parties.

A professional foreclosure help specialist company can help you with a loan modification by talking to your bank directly and working with them on your behalf to resolve a mortgage into more affordable terms. These companies are usually run by experts in the mortgage finance industry and present many advantages over a DIY endeavor:

Experience – Many of these professional modification negotiators have been operating for years and have extensive experience in negotiating new mortgage terms. They are familiar with the foreclosure and loan modification process and know what it takes to reach a deal, with even the most stubborn lenders.

Contacts – Foreclosure help specialists usually work with the biggest loan mortgage companies in the country and have many contacts within each. By having and continuing good relations with lenders, they have an upper hand in renegotiating your contract.

Results – In most cases, foreclosure help can secure an agreeable mortgage modification that is acceptable by both lender and borrower. If not, then they can work with the lender on an exit plan to avoid foreclosure by a short sale. In a short sale, you may end up selling your home for less than is owed on the mortgage, but the lender accepts the short amount and writes off the balance. This bodes much better for your credit report than foreclosure.

Millions of Americans are feeling the stings and arrows of the declining economy. In 2008, over 250,000 homes were foreclosed each month – which translates into three million homes foreclosed in the entire year. More credit card debt is racked up each month, and millions of Americans are looking to consumer credit counseling services for debt management help. Now that newly elected President Obama has signed his stimulus bill into law, what does that mean for the average American with debt management issues?

Who the Plan Will Not Help

First and foremost, Americans must realize that the stimulus plan is not “free money.” People who have uncontrollable debt management issues will not suddenly see their debt wiped away. With that said, the plan does provide debt help to those in serious trouble with their mortgages and credit card debt.

Remember that the bill is a financial plan to help stimulate the American economy, not pay off personal debt. However, by helping Americans manage and control debt, more expendable income can be spent on goods and services – which is exactly how the plan hopes to revive the economy.

How the Plan Can Relieve Mortgage Debt

Millions of American homeowners are feeling the financial crunch of extreme adjustable rate mortgage (ARM) interest hikes or job loss, and they find themselves unable to make their regular mortgage payment. With an average of 250,000 homes foreclosed per month, what are homeowners to do?

The mortgage bailout portion of the stimulus package tags $75 billion for the setup and aid of getting mortgage borrowers back on their feet to avoid foreclosure. Though the federal funds will not give you free money to pay off your back payments or reduce your principal balance, the money will be used to set up a government intermediary program that puts qualified borrowers and lenders together to discuss real solutions to mortgage problems.

A homeowner who is suffering a financial crisis and is having trouble meeting mortgage obligations can use the program to help set up and negotiate a loan modification. However, if you are not delinquent on your mortgage and have the financial ability to pay your mortgage, this plan will not help you. In addition, should you have an inability to provide evidence of future employment, mortgage companies are unlikely to help you through this plan either.

A loan modification is a change in the original mortgage terms, such as a lower interest rate or extension of payments that reduces the monthly payment amount. Working with the lender in this fashion could result in the forgiveness of much of the principal balance, limited forbearance, and ultimately, help homeowners keep their homes and avoid the expense and trouble of foreclosure.

The Benefit of Tax Rebates

President Obama has also passed tax rebates for most Americans. Taxpayers will receive a portion of their 2008 paid taxes back to them in cash. Some of that money may be needed to pay back taxes owed or can be spent directly on reducing piling credit card debt.

Americans who are careless about their debt management and spend more than their means will not see much help. It is people who are responsible and are making real efforts to pay off debt who will benefit from the stimulus bill.

What is a Loan Modification?
Loan modification is a process whereby a homeowner’s mortgage is modified and both lender and homeowner are bound by the new terms.
A loan modification is a process where one or more of the characteristics of a loan and/or its terms are adjusted because the homeowner is unable to make payments under the original terms or because the value of the property is worth less than the borrower owes.
Great I know what a Loan Modification is. What are the things to watch out for?

The Do’s
• If you work with a loan modification service, Do MAKE SURE YOU CHECK THEM OUT. Go to the better business bureau site www.bbb.org and research the company. Also asking for references is a good idea.
• If you are going to attempt to do your loan modification yourself, Do make sure you have all of your documents collected prior to talking with the bank.
• If you are going to attempt to do your loan modification yourself, do make sure you understand the loan modification process prior to contacting your bank.
• Do make sure you spend the time to write a convincing Hardship Letter. See Tip on How to Write a Hardship Letter.
The Don’t
• Don’t contact your bank’s collection department. They are only interested in collecting payment not helping you with modifying your loan. You must contact the loss mitigation department in the bank.
• Don’t stop making payments on your loans even if a loan modification advises you to. A reputable company will tell you to continue to make payments for as long as possible.
• Don’t rush through your loan modification application. It is critical that you do not make errors and that all forms you submit are correct.

Before you get started on the process of attempting to get your loan modified you must first understand that you will need a little patience. The typical time line for a loan modification is between 60 and 90 days.

The second thing you must understand is that you need to be very open in terms of your current financial and personal situation. Not disclosing information to your bank or third party negotiator will only lead to disappointment down the road for your loan modification.

Third, you must collect a number of documents. You should have them ready before you start the process so that the process can be expedited. You will need: Last years taxes, your original loan documentation, recent pay stubs, and recent bank statements. The information you provide for a loan modification is very similar information you provided when you received your loan in the first place.

Forth, you will need to write a hardship letter detailing why the bank should provide you a loan modification. For more information on hardships letters go to: Tips on How to Write a Hardship Letter and Sample Hardship Letter.

Fifth, be clear on what you actually can pay when it comes to your loan modification. Understand what new terms for your loan you can live with. Getting your loan modified but not being able to afford the new terms of the modified loan does not help anyone.

Finally, decide if you want to go it alone on your loan midifcation and negotiate with your bank all by yourself or hire a professional negotiator or attorney who has done a significant number of loan modifications. The banks do not want to end up with your home if they can help it but they will have their own interest at heart rather than yours. If you do decide to go with a third party to help you make sure you check references and make sure that the operation is a legitimate one.

A hardship letter is a letter written to your bank or mortgage company telling them why you can no longer afford to make the payments on your home. This letter describes your hardships and specifically what has happened that caused you to fall behind.

Based on the current credit environment, hardship letters are being used as a tool to help homeowners avoid foreclosure on their homes. The result can be a modification of the loan or the acceptance of a real-estate short sale by the bank.

Some basics to remember in writing your hard ship letter are to:
• Write the letter in your own words with feeling. Also show your appreciation for their time. A real person will be reading this.
• Be specific on your hardship. Good examples of hardships would be: A significant cut in pay or loss of employment, a medical issue that prevents you from working, or becoming a single parent with out child support.
• Provide the reason you fell behind on your monthly payments. Detail each delinquency with specific dates.
• Provide an offer to resolve the debt issue and show a willingness to cooperate in a solution to retain your home.
• Provide documents that show that your are having financial hardship. Examples could be recent late notices on bills, your taxes from the previous year and your bank statements.

For specific examples of a hardship letter you can use click here:  Sample Hardship Letter For Loan Modification

Overview
If you are a homeowner interested in and qualify for a loan modification, it is important to keep in mind that the lender is forgiving a portion of your debt. There are several types of loan modifications that a lender can offer you: interest rate, length of amortization, principal balance reduction for a first mortgage as well as for a second mortgage. Principal balance reduction is the most coveted approach of all loan modifications. Make sure to avoid quick fix loan modifications that may be offered to you such as a simple forbearance, short sale, deed in lieu, or temporary interest rate reduction. These types of loan modifications may seem appealing at first, but they will generally hurt you in the medium- to long-term.

While your home can be repossessed through foreclosure if payments are not made, the lender or the loan modification company cannot make any changes unless all individuals on the mortgage agree. Your notarized permission must be received to implement any changes.

—————

Interest Rate
The simplest feature in a loan modification that can be adjusted by a lender is the interest rate. If the interest rate is lowered, so is the mortgage payment.

If you are a homeowner who originated a sub-prime short term adjustable rate mortgage several years ago at 5% and then saw it adjust to 9%, for example, you probably are having quite a bit of difficulty making the additional monthly payment. Now that loan modifications are more available from lenders, you have another option.

All lenders are willing to aggressively lower interest rates for loan modifications to qualified applicants when they are not requesting a reduction of the balance reduction of the mortgage or an increase in the length of amortization. A lower interest rate on the mortgage is the simplest, safest and most cost effective loan modification for lenders.

Length of Amortization
Length of amortization refers to how many years a borrower will be paying back the mortgage. The most typical timeframe is 30 years. The amortization does not reflect the length of time that the interest rate is fixed, just the total years that the mortgage will be repaid. For example, if you have a five-year adjustable rate mortgage amortized over 30 years, the interest rate will adjust after five years and can adjust up or down for the remaining 25 or until refinanced. In order to make payments more affordable, a lender may offer you the option to stretch out the loan modification payments over 40 or 50 years. This will lower your monthly payments considerably since you would now have an extra 10 or 20 years to pay off the loan modification. Any recalculation of the amortization is always done using round numbers. The options for loan modification are 30, 40 and occasionally 50 years.

Stretching out the amortization in a loan modification does not help the higher interest rates nearly as much as it helps the lower rates. During the mortgage boom, sub-prime lenders were much more inclined to offer longer amortization for loan modifications since they were qualifying the borrower with around the same payment as the 30-year loan but they were collecting 10 more years worth of interest.

Stretching out the amortization for a loan modification has additional benefits. Borrowers who paid interest only payments for the first few years were not paying down any principal. That means that your loan lost a year of amortization each year. Therefore, if you were to have kept your loan, it would have converted after the interest only period into a fully amortized fixed loan of usually 20 or 25 years. Those payments are enormous compared to the new 40- or 50-year term. Lengthening the years of repayment in a loan modification might be helpful but usually not enough to turn around a troubled homeowner’s financial situation.

Principal Balance Reduction
The principal balance reduction is the most coveted of all loan modifications. The lender is forgiving a portion of your debt. Simply speaking, you just do not owe that money any more. Banks and lenders are very reticent to do this because this is a loss that is not recoverable and therefore not given away easily.

When banks or lenders do grant a principal balance reduction, it is because the value of the property is so much less than the balance owed that there is no reason for the homeowner to remain. If you owe $500,000 on a $400,000 property, would you want to pay those huge mortgage payments only to realize that you are still upside down? Even if you were to wait it out until the market recovers, you would not know how long it would be until the property value appreciates to $500,000 again. It would be wiser to walk away from the home, take the credit hit, and rent a very similar house down the street for half the monthly payment.

Principal balance reductions help in more ways than just reducing your debt. It also reduces your payments and the amount of interest you pay over the life of the loan.

Principal Balance Reduction involving a 1st and 2nd Mortgage
Principal balance reductions are much easier to get when you have a first and a second mortgage because in the instance of a foreclosure, the lender of the second mortgage is likely to get nothing. The proceeds from a foreclosure will result in the first mortgage getting paid off first. Then whatever is left over goes to the holder of the second trust. Holders of second mortgages are absorbing massive losses while recuperating nothing. Since lenders realize this, they are much more likely to grant a reduction. The banks or lenders would rather get 10 to 20 cents on the dollar rather than nothing. If you cannot make your payments, you are going to lose your house. Lenders are going to do what it takes to prevent that. If the same lender owns your first and second mortgages, you are in the overall best position for a principal balance reduction.

Overview
If you are a homeowner considering a loan modification, keep in mind that a bank is as interested as you are in avoiding foreclosure. If you are a borrower who can continue to make payments, a bank will make every reasonable effort to help you modify your loan. However lenders will not grant loan modifications to every applicant. If you are a borrower and you cannot show the ability to repay the loan on time and consistently for the foreseeable future, then a bank would lose more money in the process and there is little benefit for the lending institution to do a loan modification with you. Foreclosure is a better option for the bank.

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A loan modification becomes more of a liability than a foreclosure to the bank when the borrower stops making the payments. Foreclosure is designed to rectify this situation while incurring the least amount of losses from the borrower.

The notion behind turning around a liability is based on income. What amount of income can a homeowner allocate to the mortgage payment while still making ends meet? Is this a reasonable number for the bank to agree upon for a loan modification and let the homeowner stay in the house? What is the loss comparison between the proposed loan modification and the foreclosure? Can that homeowner actually make the loan modification payments that are proposed? What proof of income and cash flow is provided to back up these proposals?

If a bank agrees to a loan modification in lieu of foreclosure and the borrower still cannot make the payment, the bank is likely to lose even more. When a loan modification is agreed upon, the borrower usually has a forbearance period. The borrower’s status is also made current and past due balances are erased. Sometimes those balances are forgiven and other times they are added to the principal balance. Here is an example of the losses that the bank will take if the borrower still cannot meet the modified loan payments:

If a borrower is 90 days late when a loan modification is agreed upon and the forbearance is for three months, the bank is not receiving any payment during that time. The borrower then becomes current and is given a fresh start. But if after the loan modification is complete, the borrower starts missing payments again, the bank must now start the entire foreclosure process again.

Lenders generally will give the homeowner a few months into the loan modification before they file a notice of default, leading to foreclosure. Lenders will eventually foreclose on the property and get about the same in return at auction as they would have had they not engaged in a loan modification with the borrower. The difference is that if the property had gone into foreclosure, they would have had the money months earlier and not spent the time and resources modifying the loan. Loan modifications are very expensive to the bank, especially when they do not work, which is why banks place more stringent requirements on borrowers now to prove their ability to meet the loan modification standards in lieu of foreclosure before adjusting the terms.

More specifically, it is difficult to say exactly what the banks are looking for prior to granting a loan modification, however, ideal candidates have a number of the following characteristics:

• An interest rate above 6.9%
• Unaffordable Payements
• An Ajustable Rate Loan
• Are Deliquent on Payments
• Are Currently in Forclosure
• Have Negative Equity in their Home
• Income to pay a new negotiated payment schedule