Types of Loan Workouts

What are your long term objec­tives and what are you try­ing to achieve with your loan mit­i­ga­tion?  If you can’t answer that ques­tion, your lender will assume you don’t know what you’re doing and may try to talk you into an unrea­son­able rem­edy.  Set­ting your goals is an impor­tant part of the loan mit­i­ga­tion process.  If you know your options, you know when your bank is mak­ing a fair offer or just try­ing to take advan­tage of you. The terms you will get depend on what makes the most finan­cial sense to your lender.  Your loan mit­i­ga­tion attor­ney should talk to you about your options and help you set real­is­tic goals. 

Listed below are some of the ele­ments that may be included in the loan mit­i­ga­tion process and a brief expla­na­tion of how each ele­ment can help you resolve a trou­bled mort­gage.  The ulti­mate goal with loan mit­i­ga­tion is to save your home by adjust­ing your mort­gage to a pay­ment that you can afford for the long term.    

Waiv­ing or reduc­ing the delin­quent bal­ance: 

If late penal­ties account for most of your out­stand­ing debt, this can be a viable option. Your lender can reduce the amount you owe in late charges or, if you’re lucky, even write it off entirely.  They can also cap­i­tal­ize it and add it to your prin­ci­pal, so you won’t have to pay it up front. 

Reduc­ing the inter­est rate: 

Sub-prime lenders, with their noto­ri­ously high inter­est rates, are a big rea­son why so many peo­ple are fac­ing fore­clo­sure today.  This is why inter­est rate reduc­tion is one of the most com­mon forms of loan mod­i­fi­ca­tion.  When an inter­est rate is low­ered, pay­ments are accord­ingly reduced to a more afford­able amount.  Many mod­i­fi­ca­tions use a tiered inter­est rate which starts very low and ends up in a fixed rate loan which is com­pet­i­tive  rel­a­tive to the mort­gage market. 

Exten­sion of term: 

Your lender can also add years to your loan term, allow­ing you to spread out the pay­ments.  This may be the best arrange­ment if your income has changed and the pay­ments have become unman­age­able. Most lenders will agree to this change because they tech­ni­cally don’t lose any money. 

Change from an adjustable rate to a fixed rate mort­gage: 

Many peo­ple who fall behind are in adjustable rate mort­gages.  This means the inter­est rates are deter­mined by mar­ket indi­ca­tors and can change from month to month.  A fixed-rate mort­gage, on the other hand, uses the same rate for the entire term of the loan and is more secure for the long run.  Most mod­i­fi­ca­tions include a rate fix­ing com­po­nent for loans which cur­rently have an adjustable rate.

Reduc­tion of prin­ci­pal: 

In some cases, it may be cheaper for your lender to sim­ply reduce the amount you owe. While less com­mon, a prin­ci­pal reduc­tion is usu­ally granted when the costs of under­go­ing fore­clo­sure or a short sale are greater than the amount that the lender is able to write off.  With no appar­ent hope in sight for resolv­ing the hous­ing cri­sis and the rise in strate­gic defaults, prin­ci­pal reduc­tions are expected by many to become more com­mon mod­i­fi­ca­tions, espe­cially with cer­tain lenders.

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