What is a Loan Modification?

A loan modification is a document changing or “modifying” the existing loan made by a lender in response to a borrower’s long-term inability to repay the loan pursuant to the terms of the existing note.  A loan modification is not a new loan, but merely a written agreement between a lender and a borrower changing some of the terms.  Mortgage loan modifications typically involve one of more of the following:  a reduction in the interest rate on the loan; an extension of the length of the term of the loan; a change in the principal balance; establishment of a balloon payment; change of the type of loan (changing an interest only loan into a fixed principal and interest loan).  Lenders are not required to give loan modifications to borrowers, they are not a right.  Loan modifications are an avenue that a lender may utilize to minimize their potential losses.

Generally, loan modifications consist of three (3) tests.  The first test is the Hardship Test.  In the Hardship Test the lender analyzes the borrower’s hardship letter and financial documents to determine whether or not the borrower has a satisfactory hardship.  If the lender does not accept the borrower’s hardship claims the lender will deny the loan modification for inadequate hardship.  The guidelines for the hardship analysis tend to be a little more rigid when a borrower attempts to modify current or less than 2 months late.  In these circumstances the borrower’s file is usually handled by a separate department called Imminent Default (“ID Department”).  The ID Department’s threshold for a satisfactory hardship tends to be more rigid than regular default servicing.

The second test can be called the Affordability Test. During the Affordability Test the lender’s underwriter reviews the loan modification package, specifically, the financial information, and analyzes the results against the lender’s investor’s guidelines.  The underwriter’s goal is to see what type of workout solution would be needed in order for the borrower to maintain the loan.  The underwriter’s analysis usually establishes a proposed new interest rate, a proposed new unpaid principal balance, a proposed new amortization term and a proposed new term.

The results of the Affordability Test are then run through the third test, the Net Present Value (“NPV”) Test.  The NPV Test is a computer program that takes into consideration all aspects of the proposed loan modification and determines whether the lender’s investor will lose less money by modifying the loan in accordance with the results of the Affordability Test or by foreclosing on the property.  The NPV Test is the final say on whether or not a loan will be modified.
A point of differentiation should be made between modifications and forbearance agreements.  A forbearance agreement provides short-term relief for borrowers who have temporary financial problems, while a loan modification agreement is a long-term solution for borrowers who will never be able to repay an existing loan according to the existing terms.

Traditional Refinance Assistance:  The first option that a distressed homeowner has when facing an unmanageable loan is to look into refinancing the property and securing a new loan with a new interest rate.  When analyzing your situation, Michael Gaddis will attempt to determine if your financial situation will allow for a refinance that could substantially reduce your payments.
HARP Refinance:  For those homeowners having Freddie Mac or Fannie Mae as their investor and are otherwise prohibited from qualifying for a traditional refinance (due to income issues or too high of LTV), Michael Gaddis will attempt to determine if you might be eligible for a HARP Refinance.

Repayment Plans:  Michael Gaddis helps homeowners seeking repayment plans with their lender only as a last resort.  Michael Gaddis prefers to have homeowners attempt to work out a repayment plan directly with their lender prior to retaining his services.  Most of the time lenders will accommodate homeowners’ request for a repayment plan without much trouble.  However, there are instances when, despite a homeowner’s diligent effort to obtain a repayment plan they are unsuccessful.  In those instances Michael Gaddis is available to assist the homeowner’s effort to procure a repayment plan.

Loan Modifications:  If a refinance is not a realistic option for a homeowner, Michael Gaddis will then review the homeowner’s financial situation to estimate the probability of success of obtaining a loan modification.  In order to properly review the homeowner’s probability of success Michael Gaddis attempts to scrutinize each file as would their lender’s underwriter.  By looking at a homeowner’s situation through the eyes of an underwriter Michael Gaddis is able to find potential issues and problems that might prevent the homeowner from being able to successfully modify. A large portion of Michael Gaddis’ clients have attempted a loan modification prior to meeting with him.  These clients have either tried to modify on their own, through the assistance of a loan modification company, through the assistance of another attorney, through a non-profit company or through NACA.  Some clients have failed numerous times and after using numerous resources and after exhausting lots of money.  Read through the experiences of other homeowners by clicking on the “Testimonial” tab on this website.

With that being said, it is important to note the following:
IT IS NOT NECESSARY TO PAY A THIRD PARTY TO ARRANGE FOR A LOAN MODIFICATION OR OTHER FORM OF FORBEARANCE FROM YOUR MORTGAGE LENDER OR SERVICER. YOU MAY CALL YOUR LENDER DIRECTLY TO ASK FOR A CHANGE IN YOUR LOAN TERMS. NONPROFIT HOUSING COUNSELING AGENCIES ALSO OFFER THESE AND OTHER FORMS OF BORROWER ASSISTANCE FREE OF CHARGE. A LIST OF NONPROFIT HOUSING COUNSELING AGENCIES APPROVED BY THE UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD) IS AVAILABLE FROM YOUR LOCAL HUD OFFICE OR BY VISITING WWW.HUD.GOV.

Short Sale:  If a refinance is not possible and the outlook for a successful loan modification is not realistic and the homeowner does not have the ability and/or desire to reinstate their loan by bringing their loan current, a short sale is the next viable option.  The Law Offices of Michael Gaddis is not a real estate company so Michael Gaddis will refer interested homeowner’s desiring a short sale to www.dreamhouserealtyinc.net, a real estate company specializing in assisting distressed homeowners.

Deed in Lieu of Foreclosure:  If all other options have been exhausted a homeowner might desire to obtain a deed in lieu of foreclosure. Typically, a deed in lieu of foreclosure is a homeowner’s last option and is only available after a homeowner has unsuccessfully attempted to short sell their home.  Many times a homeowner is able to obtain a deed in lieu of foreclosure on their own.  However, Michael Gaddis provides deed in lieu of foreclosure assistance in those instances where the homeowner is unsuccessful on their own.

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