6 Tips to Modify Your Loan and Keep You out of Foreclosure

A family member of mine works for Boeing and recently went on strike October 2008.  During this time he got no salary, and only a $150 stipend a week.  As a real estate agent, I hear about foreclosures all the time, but it really hits home when someone close to you becomes a victim of foreclosure.  This article is about how to modify your loan and keep you in your home.

During the 52 day strike, he fell behind his mortgage payments nearly two months.  A couple months without pay can easily put you hopelessly behind. For you, it might not even be a strike -  unforeseen expenses, medical bills, layoffs, and anything else  could put you in a bind.  If you have a $2500 mortgage payment, and you’re two months behind for whatever reason, your next payment jumps to a whopping $7500 AND penalties! How can you possibly have that much money lying around?  The reality – it is nearly impossible to catch up on mortgage payments without some sort of loan modification or help.

Fortunately, a lender or loan servicer has several options to help you.  You can hire an attorney or a loan modification company and pay $2500+ to help you modify the loan or you can do it yourself. I recommend giving this a shot first.  A few options you can ask your lender if you’ve fallen behind:

1. Lowering the interest rate – a $400,000 loan on a 30-year fix modified from 6.5% to 4.5% allows you to cut your payments by $501.53 per month!
2. Amortizing the loan – if you have an interest only loan, the lender may modify your loan into principal and interest loan.  Although this may not reduce your monthly payment, it locks you into a fixed rate and allows you to pay or chip away principal – a good long-term plan to help you pay principal.
3. Fixing the interest rate – this allows adjustable rate mortgages (ARM’s) to fix rate to assure you won’t wake up one day with a rate 4% higher than you initially signed up for.
4. Extending note term - stretching the amortization or payment period from 15 years to 30 or 40 years can really help lower the monthly payment.  Although total interest paid increases, the monthly payments decrease.
5. Waiving penalties and late fees – most customer service reps seem to have the ability to waive penalties and late fees.  If not, a manager should be able to get this waived for you.
6. Capitalizing interest and late fees – in other words, wrapping the interest and late fees into the principal of the mortgage.  You can look at this as cleaning the slate and starting anew.

Although lenders can use the modifications mentioned above, not all lenders participate in this.  Those that allow loan modifications may use some or all of the methods above.