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Thursday, August 22, 2013

Stopping Foreclosure - Should You Request a Loan Modification?

One tool a person in foreclosure can seek to stop the foreclosure and to save their home is a Loan Modification.

A Loan Modification is where the Lender agrees to change the terms of a mortgage permanently. These changes allow the monthly payment to be reduced to an amount the person can afford. It also allows the loan to be reinstated.

A person in foreclosure can contact their lender and ask if they can qualify for a Loan Modification. The lender will send them a financial statement to complete and also ask them to submit a letter explaining why they fell behind on their mortgage payments.

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For those who do not have a background in finance the Financial Statement can be challenging. Just looking at it will get some people to say that there is no way they can complete it. They give up right then and there. They feel all is lost.

On the Financial Statement the person has to indicate their monthly income. If they took out the mortgage with another person, that person also has to indicate their monthly income. The monthly income is their gross monthly income from all sources - their job, Unemployment Compensation, Child Support, Alimony, Disability Income, Rental and any Other Sources.

This is Gross Income - the income they receive before taxes and all other deductions. It is monthly income. If the person is paid weekly, they should multiply their weekly gross income by 52 and then divide by 12. If they are paid every 2 weeks, they should multiply the gross by 26 and divide by 12. If they are paid twice a month, that is the easiest. Multiply the gross by 2.

Next the person has to subtract the Federal and State tax and FICA they pay from the Gross. Also if the person has a 401k deduction they have to subtract that too.

They then calculate their monthly expenses. The first is what they pay on their mortgages and in rent. Then there is their monthly payment on their auto loan and any credit card and installment loans they have. Next is what they pay monthly for car insurance and any other auto expenses (gas, repairs, tolls, etc.)

If they have to pay for insurance, they indicate what they pay monthly. If they pay for medical care over and above what their insurance covers, they list the monthly total. They then show the monthly cost for child care, child support and alimony.

Hold it - We are not done yet.

They then list what they spend for food and entertainment monthly. Next they show what they pay for water, sewer, utilities and phone. Last, they show any other expenses.

Are you starting to see why some people throw up their hands and walk away from completing this form? It really frightens them and we aren't done yet.

They then list their assets. They indicate how much they have in checking and savings accounts, Stocks, Bonds and Certificates of Deposits. They then enter how much they have in retirement accounts, like 401k plans, ESOP plans and IRA accounts. Next they enter the value of their home, any other real estate they own, any cars that are free and clear and any other major assets that they have.

This Financial Statement is very detailed. Even people with college and advanced degrees will struggle to complete it accurately.

In addition to the Financial Statement, the person requesting a Loan Modification also has to write a letter explaining the reason or reasons they fell behind on their mortgage payments. Most people have difficulty with this. They have no idea what to say in this letter. They are frequently worried that if they say the wrong thing, their request for a Loan Modification will be denied and they will lose their home for sure.

It is best for a person in foreclosure or facing foreclosure to seek help from someone who has a background in helping other people who have been through foreclosure. This may be a lawyer or an expert in the field. This person can help them determine what course of action to take.

The Loan Modification may be the way to go. It needs to be analyzed to see if it will reduce their payment sufficiently so that they won't have difficulty making the monthly payment. If it is the best way for them to save their home, it should be pursued. Their lawyer or expert can help them complete the financial statement and write the letter of explanation. More importantly the lawyer or expert will work with them to get the best terms in any Loan Modification with the lender.

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