Loan Modification: How Much Can You Save?

Loan modifications are designed to make mortgages more affordable for homeowners. Whether you get an interest rate reduction, a term extension, or a principal forgiveness, the point of getting your loan modified is to reduce your payments so that you can more easily afford it. But how much does a loan modification really save you?

Nationwide, the average homeowner saves $812 a month after a loan modification. Of course, this is far from indicative—the figures can vary from a couple of hundred to several thousand dollars. Below are some of the factors that affect your potential loan modification savings.

Debt-to-income ratio
This number indicates how much of your monthly income goes into debt payments. This includes not just your mortgage, but also your credit cards, student loans, car loans, and other debts you currently have. Most banks will try to fit your monthly payments down to 31% of your debt-to-income ratio, the standard set by the government.

Principal balance
The amount you currently owe is probably the biggest factor in your loan modification payments. For a loan modification to make sense to your lender, your monthly payments must be a reasonable percentage of your balance. Generally, the larger the unpaid amount, the more the bank loses in a loan modification and the smaller your chances of approval.

Type of modification
The most common form of loan modification is an interest rate adjustment. By lowering your interest rates, the bank reduces the amount you pay every month without reducing your principal. The government allows interest rates as low as 2% on a loan modification, if it means bringing the payments down to affordable levels.

Other structure types
If reducing your interest to 2% does not help, your lender may propose other ways to bring your monthly payments down. A common alternative is a term extension, wherein your payments are spread out over a longer period. In some cases a lender may also reduce the principal itself, although this isn’t common in the loan modification market.

Loan modification alternatives
Some homeowners are simply too far behind or are in too much hardship to afford the payments, even after a loan modification. In this case, lenders usually offer other ways to prevent foreclosure, such as a short sale or a deed-in-lieu. These won’t let you keep your home, but they let you get rid of the heavy mortgage without the stress and damage of a foreclosure.

Getting a Loan Modification for Your Second Mortgage

Last year, getting a loan modification for a second home was close to impossible - with two different parties holding stake, there wasn’t much chance for a second mortgage to get approved. But thanks to new changes in President Obama’s home loan modification program, people who have second mortgages in default can now get the help they need. Read on to learn more about getting a federal loan modification for second mortgages, and how you can make the most of it.

Who’s in it?
The program is voluntary, but most major lenders have already signed up and more are expected to join in. To find out whether your lender is taking part, call up the bank’s loss mitigation department—it’s the office that usually takes care of loan modification plans. If they’re not part of it, chances are they offer a different program for second mortgages.

How does it work?
The government encourages lenders to participate by offering a $1,500 incentive for every home loan modification they approve. Upon getting approved, borrowers will also get a $500 upfront payment and additional $250 over the next three years, credited against their outstanding balance, provided they do not default again during the period.

How does it change my mortgage?
The home loan modification can reduce your interest rate to as low as 1% for as long as five years. The numbers may vary according to factors such as your income, your current balance, and your payment history. Other loan modification plans also exist, such as a principal reduction or an extension of loan terms. The type of assistance you get depends on how well you can negotiate with your lender and the current state of your mortgage.

How do I qualify?
The qualifications for a second home loan modification are more or less the same as for a primary home. First of all, you need to present a valid hardship to justify falling behind—a medical emergency, job or income loss, or a death in the family. The lender will most likely assess you based on your debt-to-income ratio—the total amount of debt you have versus your total monthly income—so you may also need to present a source of income.

Getting a second loan modification can be complicated, but it’s not difficult. If you’re considering a home loan modification on your second mortgage, you may want to work with a loan modification attorney—a professional who can guide you through the whole process from application to signing day. Look for one with specific experience in your area and property type, and make sure to plan ahead to ensure the best results.