How To Avoid Foreclosure By Negotiating A Lower Rate Or A Loan Modification
How to Avoid Foreclosure by Negotiating a Lower Rate or a Loan Modification
If your mortgage payment is a staining your monthly expenses, or even if you are just looking for options to get your loan paid down faster, you might consider how to negotiate a lower rate.
Understanding Your Mortgage Payment
A mortgage payment has 4 primary variables: Your Principle, Interest, Taxes and Insure (also known as “PITI”). Of those 4 variables, your mortgage loan only affects the first two, your principle and interest.
While in this article, we’ll be discussing the first two variables, it never hurts to call your mortgage broker to see if you can get a better deal on your insurance, as that can also lower your monthly mortgage payment. Likewise, in some instances you can contest the way the county appraises your home, or claim homestead, to reduce your taxes.
Understanding Your Options
There are two fundamentally different avenues to seek a reduction in your mortgage payment – a “refinance” and a “loan modification.” A refinance is basically getting a new loan at a lower loan rate to “swallow up” your old loan. In most instances, for a refinance, you would need to be up-to-date on your mortgage, and the better your credit and your income, the better your chance of approval. For a loan modification, in most instances lenders won’t consider a modification unless you are behind on your mortgage. This is catch-22, because when a homeowner falls behind, their credit is impaired and they risk foreclosure on the property.
To attempt to negotiate your principle and interest, I recommend these steps:
- First, explore your less-risky options. As might be evident, it makes sense to explore refinance options before seeking a modification. This way you are not putting your credit and your home at risk. Also, while most lenders won’t change a loan interest rate unless a loan is behind, it can’t hurt to ask you lender if they will reduce your rate. As the express goes, you miss 100% of the shots you don’t take
- Tips for Refinancing. For a refinance, I recommend contacting at least 3 lenders to explore your options. Applying for a loan does have a slight impact on credit; however, as FICO explains, when you apply for several loans at the same time, the credit reporting agencies know that you are loan shopping and there is less scoring impact. Try using a service that will screen you against several lenders at once. I like Credible.com. Lendingtree is another good option.
- Request a Modification Form. If a refinance isn’t possible and if you are already behind on your mortgage, a modification is the next best option. Contact your lender for a modification request form. The form will vary a little from lender to lender, but in general you will have to disclose information about your finances.
- Filling out the Forms. When completing the form, make sure to review it carefully so that all requested information is provided. There will be some sections that ask for a calculation – like your income verse expenses. If there is a “total” at the bottom, fill that out. Likewise, there can be IRS request forms. Follow the instructions on those forms carefully.
- Provide Complete Documents. The form will likely request that provide some documents for the lenders review. Make sure to provide complete sets of documents. For example, if the form asks for a copy of a tax return and your return is two pages, be sure to include both pages. Incomplete documents can lead to a modification request getting stuck for months and denied altogether.
- Submit Your Forms. Submit the forms to the lender, and follow up with phone calls to check on your modification status, at least once per week.
- If You Get Denied. The decision on whether a modification is approved is ultimately up to the lender. But there usually is an opportunity to appeal if they got their numbers wrong. Review your denial letter in detail for more information. Also, in some instances, there can still be options. If you get denied and want to know your alternatives, contact us a for a free consultation.
- Important Note: A loan that is in deferment generally is not treated as behind. There can be different modification options available for loans in “COVID deferment.” Explore those options with your lender.
One last tip
While principle reductions were pretty common in loan modification shortly after the 2008 crash, they are very exception as of this writing (2021). In most instances, if a lender agrees to a loan modification, any back amount owed will be put into the loan, increasing the loan balance.
Contact attorney Michael Ziegler in Florida for a free case evaluation today. He founded his law firm on the principles of professional quality and personal care.