Mortgage Restructuring: Is it Right for You?
November 8, 2007
With today’s housing market being what it is there is little wonder that many homeowners are thinking of refinancing or restructuring their mortgage loans. For some homeowners, the motive is to get a better rate which, in turn, leads to lower payments. Other homeowners, however, need to restructure simply to make the payments and to avoid foreclosure. This is especially true for those who are under adjustable rate mortgages.
Here is how this might work. A homeowner gets a mailer from the lender stating that a new monthly payment is required due to a reset of the adjustable mortgage loan. In some cases, this reset amount can be so high that the borrower simply cannot make the payment. Homeowners who put down a fair sized down payment and have been making their payments on time and have some equity in the home may find themselves in jeopardy. Restructuring the loan seems like a good idea. It certainly seems better than foreclosure.
Here is the kicker. Some lenders may act faster to foreclose on this type of customer than on other customers who, frankly, did not put any down payment on their homes and who actually owe more on the home than what it is currently worth.
Why would they want to do that? It almost seems counterproductive to penalize a homeowner who put cold cash down on his or her home, made payments so that some equity had been built up in the home, and not penalize what some might call less-qualified buyers.
The truth is some lenders would prefer to foreclose on homes that offer the best return for them, the lenders. If lenders think they can sell the foreclosure and make back their expenses they believe they have a better chance of recouping their investment. This can actually only happen if there is substantial home equity in the foreclosure.
Almost as if common sense had no role in this scheme, homeowners may actually find it easier to get a loan restructuring plan if they pay a few payments late. Consumers should also realize that they will be in for an uphill battle with some lenders when it comes to getting a loan restructure. The one thing consumers should keep in mind when being refused is that the current payments are not going to go anywhere. They will have to be dealt with in one fashion or another, which can give many homeowners the moral boost they need to keep trying for the loan modification they need.
It is also important to keep in mind that if the modification is accepted it only means that the homeowner will be allowed to skip a few payments or to lower the monthly payments. The amount of the original loan will not change. You will still be paying the whole amount, in some cases a bit more, as if the new modifications had not happened. Only the terms in which the amount is to paid will change.
For those who need to explore this option, the first step is to talk to the lender’s REO department. REO stands for Real Estate Owned. You might also try the loan mitigation department. This is usually a slow process, so the sooner begun the better.
An important part of this process is being prepared in advance. Homeowners will need to know, and be able to tell, the lender what amount of payment they can afford. You most often have to substantiate this request. Paperwork such as pay stubs, bank statements, W-2 forms, property tax information, and even home insurance bills may be called for by the lender. If you can do so, try to get home appraisal information concerning your house and property before beginning the process.
A very important calculation that you need to have on hand before you contact the lender is your debt-to-income ratio. This number is often the key to knowing the amount of payment you can afford to pay each month. There are several online calculators that can do this math for you. You punch in your data and it brings back a result.
Loan restructuring or modifications, as some people call them, should only be used when homeowners are truly unable to make the higher payments incurred by resets. You have to actually prove to the lender that you cannot afford the new payments. This is not the same as refinancing to a lower rate. This is an emergency type of modification in order to avoid foreclosure or bankruptcy.
Consumers should keep in mind that interest-rate reductions will not appear on credit reports, but loan payment modifications will. This may have an affect on future borrowing abilities, but the same can be said for foreclosures and bankruptcies. It is far better to do something rather than to do nothing when your home, as well as your credit reputation, is at stake