Loan Modification Terms and Definitions
The basic definition of a Loan Modification would be any modification that is made to an existing loan by the lender as a response to a borrower's inability to repay the loan. It could be in the form of an extension on the length of the term of the loan, it may involve a reduction in the interest rate on the loan, or the type of loan could change.
In some cases, a combination of the three might occur. Lenders typically approve loan modification when the cost of doing so is less than the cost of default.
Let's take a look at some other common terms and definitions you may come across during the process of a loan modification.
The repayment of a loan (typically a mortgage) through regular payments. Payments are determined by the duration of the loan, the remaining capital and interest rates.
Back End Debt to Income (Back End DTI) ratio:
Represents the total monthly expenses divided by the gross household income. If this figure is higher than 55%, then the homeowner may be required to attend Consumer Credit Counseling.
May be either deferred or forgiven, the final method available to reach the target payment. This is the last resort, and not very common.
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BPO: Broker Price Opinion
The lender will pay a real estate broker to complete a price opinion the property. Usually the lender has their own form and criteria for how the valuation of the property will be verified.
Difference between total debt and expenses and net monthly income
CLTV (Combined loan to value) ratio:
A percentage calculated by dividing the total loan amounts by the Market Value (Appraised value) of the home.
DTI: Debt to Income Ratio
Several investors and servicers are using 35% or 38% to qualify. It depends on the investor as to which %.
Expected Rate Change:
The annual adjustment you expect in your ARM. The range for this calculator is minus 3% to plus 3%. Use a negative value if you believe interest rates will decrease, a positive value if you believe they will increase.
Front End Debt to Income Ratio (Front-End DTI):
Represents current mortgage payment (including principal, interest, property taxes, homeowners insurance & any homeowners dues) divided by gross household income. If this figure is less than 31%, then the homeowner is not eligible for The Making Home Affordable plans.
GSE: Government Sponsored Enterprises
The government sponsored enterprises (GSEs) are a group of financial services corporations created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent. The desired effect of the GSEs is to enhance the availability and reduce the cost of credit to the targeted borrowing sectors: agriculture, home finance and education.
HAFA: Home Affordable Foreclosure Alternatives
HAFA was designed to offer homeowners, their mortgage servicers and investors an incentive for completing a short sale or deed-in-lieu of foreclosure. With HAFA, homeowners are given options to help them leave their home and transition into more affordable housing while alleviating the mortgage debt they owe.
Home Affordable Foreclosure Alternatives explained
HAMP: Home Affordable Modification Program
HAMP was designed to make homes affordable to anyone who was struggling to make their monthly loan payments by enabling them to modify the original terms of the loan, usually with a lower interest rate or a longer payment term.
Home Affordable Modification Program explained
A Hardship affidavit means that the borrower is unable to continue making full mortgage payments and describes one or more of the following types of hardship:
- A reduction in or loss of income that was supporting the mortgage;
- A change in household financial circumstances;
- A recent or upcoming increase in the monthly mortgage payment;
- An increase in other expenses;
- A lack of sufficient cash reserves to maintain payment on the mortgage and cover basic living expenses at the same time. Cash reserves include assets such as cash, savings, money market funds, marketable stocks or bonds excluding retirement accounts and assets that serve as an emergency fund. Reserves are generally considered to be equal to three times the borrower's monthly debt payments.
- Excessive monthly debt payments and overextension with creditors, e.g., the borrower was required to use credit cards, a home equity loan, or other credit to make the mortgage payment;
- Other reasons for hardship detailed by the borrower.
- Divorce or separation
- Death of spouse/co-borrower/family member
- Military service
Additional Resources on Hardship:
How to write a hardship letter for loan modifications
Conditions that qualify
as a hardship for loan modifications explained
HARP: Home Affordable Refinance Program
HARP was created by the U.S. federal government in an effort to assist homeowners who are current on their mortgage, but are unable to refinance on their loan due to a decrease in the property value, leaving them "underwater".
Home Affordable Refinance Program explained
HE: Hard Expenses
Hard expenses are monthly expenses that are definite and documented. Examples include installment debt like mortgage payments, car loans, and personal loans. Most hard expenses will be included on one's credit report.
HUD: Department of Housing and Urban Development
The department of the U.S. federal government that institutes and administers all federal programs dealing with better housing, urban renewal, and metropolitan planning.
Imminent Default / Reasonably Foreseeable:
Applies to homeowners who are not yet delinquent on their mortgage payments. Every potentially eligible borrower who calls or writes in to their servicer in reference to a modification must be screened for hardship. This screen must ascertain whether the borrower has had a change in circumstances that causes financial hardship, or is facing a recent or imminent increase in the payment that is likely to create a financial hardship (payment shock). If the borrower reports a material change in circumstances, the servicer must ask about current income and assets, and current expenses as well as the specific circumstances relating to the claimed financial hardship. Each of these elements shall be verified through documentation. If the servicer determines that a non-defaulted borrower facing a financial hardship is in Imminent Default and will be unable to make his or her mortgage payment in the immediate future, the servicer must apply the NPV Test.
A loan from the structure where you pay only the interest for the life of the loan and pay the capital only after a given period.
Interest Only ARM:
An Interest Only ARM only requires monthly interest payments. Since you are not paying any principal, as you are with the other two types of mortgages described above, this can lower your monthly payment. However, since your mortgage's principal balance is not decreased, you will have a balloon payment at the end of the mortgage's term. Like a Fully Amortizing ARM, an Interest Only ARM will often have a period where the interest rate is fixed, and then it is adjusted annually. An Interest Only ARM will also have a maximum interest rate that it will not exceed. This calculator uses a maximum interest rate of 12%.
Annual interest rate for each mortgage type. Typically an ARM will have a lower interest rate than a fixed rate mortgage. The rate of an Interest Only ARM will vary by lender.
Interest Rate Cap:
This is the maximum interest rate for this mortgage. The mortgage's interest rate will never exceed the interest rate cap.
LTV (loan to value) ratio:
A percentage calculated by dividing the first loan amount by the Market Value (Appraised value) of the home.
Monthly principal and interest payment (PI) for the Fixed Rate Mortgage and the Fully Amortizing ARM. This is an interest only payment for an Interest Only ARM.
Months Rate Fixed:
This is the number of months the rate is fixed for an ARM. During this period the interest rate and the monthly payment will remain fixed. The rate will then adjust annually by the expected rate change.
Expected balance for your mortgage.
NPV: Net Present Value
A mathematical formula that will tell the investor whether it makes sense to modify which will allow them to see cash over time or to foreclose and receive cash now.
Payment at 31%:
The target Principal & Interest payment ratio as determined by the Treasury Department. Lenders will be subsidized for a portion of their losses incurred by revised loan terms to reach this target payment. The federal government "shares" in the cost to modify the loan. Calculation equals 31% of gross monthly income, less monthly amounts for property taxes, insurance & any HOA dues.
The original amount that you borrow with an obligation to repay the amount over a set term.
Principal Balance Reduction:
A type of loan modification from your lender, which reduced the balance to reduce your monthly payments. Lenders usually grant that the people in areas heavily impaired, or when the amount of depreciation is always lower than the cost of foreclosure of your home.
SE: Soft Expenses
Monthly expenses that fluctuate and are difficult to document. These include food, gas, incidentals, entertainment and are not reported on one's credit report.
Standard modification waterfall:
As of 1/12/2011, according to the Making Home Affordable, the servicer applies the standard modification waterfall to reduce monthly mortgage payment to 31% of gross (pre-tax) income. Here are the 4 steps that the servicer uses in calculating the target modified payment.
- Step 1: Capitalize outstanding interest, escrow advances, out-of-pocket servicing expenses (no late fees).
- Step 2: Cut interest rate to as low as 2%.
- Step 3: Extend loan terms to 40 years.
- Step 4: Defer portion of principal, interest-free, until loan is paid off.
The length of time (generally in months) to repay the principle.
Term in Years:
The number of years over which you will repay this mortgage. The most common mortgage terms are 15 years and 30 years. Please note that for the Interest Only ARM you will have a balloon payment for the entire principal balance at the end of the loan term.
30-year payment rate:
The first "waterfall" method used to reach the 31% target is to lower the rate to as low as 2%
40-year payment rate:
The second "waterfall" method used to reach the 31% target payment-if needed, extend the loan term to 40 years.
Whether you're already facing foreclosure or anticipating having difficulty maintaining your mortgage payments, the Tampa Foreclosure Defense Attorneys at Fernandez Law Group have plenty of experience in dealing with all types of situations.
A short sale, loan modification or foreclosure defense is not something you should do on your own and we strongly advise you to consult with an experienced foreclosure defense attorney if you have any questions and also to ensure you're protected when it comes time to negotiate with the lender for terms that are more acceptable to you.
Call or Text us today at 813-489-3222 for a FREE consultation.
Additional Foreclosure Defense Information:
Additional information about Loan Modifications:
Additional information on Short Sales:
Content authored by Gaston Fernandez
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