The U.S. subprime mortgage meltdown that began in late 2007 brought on a severe economic recession. Years later, many households still are trying to work their way back to financial solvency. One of the more important restorative tools is a mortgage loan modification -- often one of a group of government-initiated programs under the umbrella of the Home Affordable Modification Program, or HAMP.
Just qualifying for one of these programs is incredibly difficult. If you've actually moved your loan modification application forward to a point where you are negotiating terms with your lender, you are in the lucky minority. Here are some tips from the trenches about how to close the deal on the best available terms.
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Negotiating a Reduction in the Principal Amount Owing
A loan modification involves one or more of the following: a reduction in the principal amount owing, a lower interest rate and a partial forgiveness of accrued penalties and fees including the good faith payment most lenders require at the beginning of the negotiation process.
Getting the principal amount reduced is toughest. At least one realtor claims that banks doing loan modifications simply won't reduce principal amounts. This is countered by government HAMP documents, however, that state if the loan amount exceeds 115 percent of the current appraised value of the home, "the servicer must consider whether a Principal Reduction Alternative (PRA) ...should be effected as one part of the HAMP modification." If your lender claims not to know about this and your loan qualifies, show her the literature that confirms your right to a principal reduction. In this instance and at every other stage of the negotiation, put your requests in writing and confirm their delivery.
Negotiating a lower interest rate
Depending upon your financial situation, you may be able to obtain a new interest rate of as little as 2 percent. Note that whatever rate you get starts climbing again at 1 percent per year after five years, in most cases for three or four consecutive years.
Realtors with experience in this area claim that in most cases, applicants who complete the loan modification process are able to achieve an interest rate reduction. Those with current loan payment schedules calling for payments that exceed 31 percent of income can achieve the greatest rate reductions, but all borrowers in financial difficulty are eligible for some relief. Read the HAMP documents and determine the interest rate tier you are eligible for, then present these documents as evidence when asking for the reduction.
There also are alternative loan modification programs that include principal reduction that are available for VA loans and FHA loans.
Negotiating Penalties
Instead of breaking out the penalties and trying to negotiate them as separate items, try for a new reduced loan amount that includes everything. It's easier to get the penalties to disappear than to get them reduced or forgiven. In a typical instance, one Chase borrower achieved a $250,000 principal balance reduction on a $1.1 million mortgage that included a one-time payment buyout of a $100,000 second mortgage for $20,000. The penalties were absorbed into the lowered principal amount, effectively canceling them.