Principal Reduction

While principal reductions are granted in some situations, this should be considered the exception rather than the rule. Much of the decision to offer a principal reduction will be based on the equity position of the borrower. Properties where the mortgage loan amount is more than the property is worth will be more challenging for the lender than in a situation where a borrower has a lot of home equity.

Lenders tend to stay away from reducing principal in part because if the borrower should wind up defaulting on the modified loan, the losses incurred by the lender will now include the expense of the loan modification, plus that of the foreclosure.

Help with other debt

Borrowers that have manageable mortgage payments, including favorable rates and terms, but are overwhelmed with credit card debt or other bills may find challenges in the loan modification process. Though lenders will often allow debt consolidation loans for borrowers in good financial standing, they are not likely to be interested in taking on all the debt burdens of someone who is having trouble paying their bills.

More than short-term help if unemployed

If a borrower is temporarily unemployed, terms may be worked out with the lender to help weather a short-term hardship. Borrowers that have few or no prospects of future employment will be in a predicament, at least until they find employment.

Unemployment insurance, whatever amount it may be, cannot be reported as an income source in applying for a loan modification. The reason is that it, unlike a Social Security benefit, unemployment benefits have limits on how long they can continue. Lenders are looking for stable income with a probability of continuance.

Multiple Modifications

The instance of borrowers receiving loan modifications, then needing further modifications is becoming more prevalent. The purpose of a loan modification is to put the borrower in a position where they are able to make their mortgage payments.

Borrowers who have to request a second loan modification, either due to new hardships or by failing to adjust bad spending habits, will be less likely to be welcomed back at a lender that helped them the first time.

There will come a time where the lender will decide that the borrower has taken on either too much house, too much other debt, or both, and will allow the borrower to fall into foreclosure rather than invest any more of their own resources in a lost cause.

Published on November 23, 2009