When you need a loan modification, you really need one. It might be the only way to save your home and avoid foreclosure. Getting one is great, but what will the terms of your loan modification be? Will they be great, with a lower monthly payment that you can easily afford, or will they be bad and cause you to default again?
It depends. Loan modifications have as much variety as the mortgages they modify and the people who get them. No one can tell you what terms you will have until your bank offers you a final loan modification.
In fact, no one can guarantee that you will get a loan modification at all, much less that it will have certain terms.
Someone can tell you that you are a good candidate and you are likely to get certain terms if approved, but no one can guarantee that you'll get anything.
BEWARE OF ANYONE WHO GUARANTEES YOU A LOAN MODIFICATION OR CERTAIN TERMS! THEY COULD BE SCAMMERS.
A loan modification is a negotiation between all the parties involved in the mortgage. The investor who owns the loan, the mortgage servicer, and the homeowner all have to work together to make it happen.
Of course, everyone would prefer to be immediately approved for a permanent loan modification with a huge principal reduction, low fixed interest rate, and drastically lower monthly payment. That would be the best case scenario (other than a free house). But real life isn't always the best case scenario.
Let's look at the terms that can be modified and what they can be realistically modified to.
The interest rate on a mortgage can change when a permanent loan modification is approved. It can go as low as the current market rate, which is about 4% as of this writing. If the mortgage has a much higher interest rate than that, then there's the potential for savings from lowering it.
If your loan is owned by a private investor, then they may only lower the interest rate a little bit or not at all. Private investors can do whatever they want. When the government's HAMP modifications were available, interest rates could be lowered to 2%, which is even lower than the market rate. HAMP ended in 2016 and 2% is no longer possible, but you may still be able to get a lower interest rate from an in-house loan modification from your bank.
Whether or not your loan modification includes a lower interest rate depends on your current rate and who the investor in your loan is.
Loan modifications often extend the term of a mortgage to 40 years. Most mortgages have a 30 year term at the time of purchase, so after a default stretching the amount of time to repay the loan over an extra decade can reduce the monthly payment by a significant amount. FHA and VA loans are modified to a maximum of 30 years and never 40.
Getting a principal reduction is every homeowner's dream. Who wouldn't want to owe less money? Homeowners who are underwater (owe more than on their mortgage than the home is worth) especially want and need a principal reduction. Unfortunately it's rare for principal to be reduced in a loan modification. Your bank doesn't want to give up any money they are owed unless they have to, and they don't really have to. It does happen sometimes, but you should not count on getting a principal reduction with your loan modification.
The monthly payment of a modified mortgage will reflect the interest rate, term length, and principal balance. Homeowners would prefer to have a lower monthly payment so they are less likely to fall behind on mortgage payments in the future. Sometimes that happens and payments are reduced by a large amount. Other times the payment actually goes up because of all the late fees that were accumulated. The monthly payment is a big determining factor in whether the loan mod gets approved or not. If the term length is stretched to 40 years and the interest rate is lowered to the minimum and the projected monthly payment still isn't affordable with the borrower's income, it won't be approved.
Sometimes the bank will take the amount a borrower is past due and defer it until the loan matures, making it due as a balloon payment in 40 years. Depending on how long you've been in default the past due amount could be tens or hundreds of thousands of dollars. A deferment can allow you to have a principal balance and monthly payment similar to what you would have had if you hadn't defaulted in the first place.
Again, you can't know what the terms of your modified mortgage will be until your bank makes you an offer. Once an offer is made you can accept or reject it, but getting that offer can be a challenge.
Some homeowners will take any loan modification that they are offered, even if it's not good and a better one could be had, since they don't know any better and need it to save their home and avoid foreclosure. Others go through all the work of applying for a loan modification and get denied, sometimes more than once.
You can increase your odds of getting approved for a good loan modification by working with someone who has experience getting them for other people, such as a qualified foreclosure defense attorney. They may be more affordable than you think and can be well worth the expense.
Image courtesy of Stuart Miles and Sira Anamwong at FreeDigitalPhotos.net