Real Estate Values and Loan Modification

Is it true they can modify your loan toward value around your area. For example you owe 700k and the houses around you are only worth 300k, is it true they can modify it?

3 Answers

In short, yes, but for FYI, **Loan Modifications **usually include one or more of the following:

  • Interest rate reduction

  • Add past loan payments, late fees and back taxes to the principle loan balance

  • Extend the repayment period of the loan

  • Reduce or modify the monthly payment

  • Offer monthly payment forbearance or deferment

  • Loan balance reduction

Take advantage of your lender's existing loan modification options as lenders are being encouraged by Government Agencies to negotiate reduced rates, principles reductions and help homeowners avoid foreclosure.

Sorry to say this takes a severe hardship situation.

Before a lender is going to lose more money(than they have to) they will first see if by adjusting the interest rate, term of the mortgage and reassign arrears to the rear of the loan before reducing a balance.

And before that, again a hardship must be documented. If you do a net take home minus ALL bills and you have .01 left, they don't have many reasons to help you as they don't consider the fact that you owe more than it's currently worth to be considered a hardship.

If you or your spouse lost their job(and both were needed to qualify for loan) or you had an adjustable rate mortgage that has adjusted, or will, and the new payment will take you into the red, they will work with you. If by reducing therate, changing the term or moving lates doesn't create a workable situation, than a balance reduction will be considered ONLY if there a negative equity situation. If none of that works, that means you have the equity to sell and that's what they will tell you to do or lose your home.

There is another side. Depending on the type of loan you took out, an audit may reveal items that allow for a rescinding or can be used as leverage to FORCE the lender to reduce the balance. For example, if you can prove fraud or a TILA violation, you may be able to force the lender to modify the loan.

Loan modification is certainly possible, however loan modification due to dropping Real Estate values is unlikely. To understand a modification, you need to take a look at what terms you agreed upon at the time of purchase. A mortgage and a note were signed when you took out the loan. The mortgage would state that you were pledging a certain piece of Real Estate as collateral against the funds that were lent to you to purchase the home. The note outlines that terms at which you have agreed to pay back the loan. These will include the date your repayment begins, the interest rate, the amount of the payments, and how many payments you will have.

A loan modification is modifying the note that you signed at the time of close. There are several reasons this may happen, and several avenues this may take. It is first necessary to understand that the note you signed is a legally binding agreement between you and the lender. Anything in this note can be modified, as long as it is agreed upon by both you and the lender, as you are changing the agreement that you made. Forms of modification may include the following:

1.) Reducing the interest rate on the loan, which will allow for a lower monthly payment.

2.) Fixing an interest rate on an Adjustable Rate Mortgage (ARM).

3.) Reamortizing the note to extend the term of the loan and help lower payments.

4.) Lowering the principal balance on the loan.

Once you understand what can be done, you need to understand why it would be done. A lender will typically only agree to modify a loan if there is current proof that you are having difficulty handling the payment, or have had a situation that has adversly affected your ability to repay the loan (lost job, loss of income, etc). A lender will not typically lower a balance of a loan simply because. Real Estate is an investment like anything else, and is not guaranteed to increase in value. Simply because home values have dropped doesn't mean that you should owe less on the home. By the same token, should property values rise in the future, is the bank entitled to more money because the value appreciated? Loan modifications, while they exist, are typically done to help a homeowner retain a home when they are in danger of losing it. They are not designed to insure a borrower against an unrealized loss on investment due to property values dropping.