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Loan modifications are complex animals not because the concept behind them is complicated but because of all the elements that compose it and the various options and permutations of these options that must be decided. The jargon linked to loan modifications can also make it a challenge to understand the instructions you read in the literature.

This series of articles “Loan Modification Questions” is designed to clarify some of the most important questions you can ask yourself about loan modifications as well as busting some jargon by using plain English to explain what your options are.

Loan Modifications are based on a simple concept to renegotiate a loan or mortgage in order to provide some advantage or benefit to one or both of the parties. The loan modification the government is now backing is designed to allow struggling borrowers that have some form of income and can pay their mortgage if their monthly payments are reduced, their late fees are waivered or some other modification is carried out.

One of the ways this is carried out is to capitalize or include in the loan modification costs or fees the borrower must currently pay on top of his monthly payments.

Can a mortgagee capitalize an escrow advance for Homeowner´s Association fees when using a loan modification option?
The answer is yes. HUD Handbook 4330.1 REV-5, Paragraph 2-1, Section B under Escrow Obligations states: Mortgagees must also escrow fund for those items which, if not paid, would create liens on the property positioned ahead of the FHA insured mortgage.

In other words the FHA insured mortgage must have first rights on the loans security, the house. For this to happen pending fees and costs must be capitalized into the mortgage.

Interest Rates.
One of the reasons the government is pushing for loan modifications is so that homeowners whose homes have dropped in value can benefit from the current lower interest rates. Is there a new basis interest rate which mortgagees may assess when completing a Loan Modification?
The answer is again yes. Mortgage Letter 2008-21 explains that the new basis interest rate is 200 points above the monthly average yield on U.S Treasury Securities adjusted to a constant maturity of 10 years. This links the interest rate applicable to loan modifications to Treasury Securities.
An important issue when applying for a loan modification is that the loan modified is the primary loan. Will HUD subordinate a Partial Claim, if a mortgagor (the borrower) subsequently defaults and qualifies for a loan modification?
Yes, HUD will subordinate a Partial Claim if a mortgagor defaults and qualifies for a Loan Modification.
These are just a few of the questions you are probably dealing with if you are searching for a suitable loan modification. The best advice is to ask for free advice from a government institution and ask what your options are.

Related posts:

1. Loan Modifications Questions: escrow analysis, unemployed homeowners and upfront premiums.
2. Loan Modifications Questions: Fees, Inspections, Late Charges And Other Concerns
3. What To Look For In A Loan Modification

Related posts:

1. Loan Modifications Questions: escrow analysis, unemployed homeowners and upfront premiums.
2. Loan Modifications Questions: Fees, Inspections, Late Charges And Other Concerns
3. What To Look For In A Loan Modification

A balloon mortgage is one in which monthly payments are made for a pre-determined period of time, with the balance of the loan paid in full at the end of the loan term. Like an ARM, interest rates on a balloon mortgage are typically lower than on a fixed rate mortgage and this makes the monthly payments on a this type of mortgage are very low and affordable. Balloon mortgage loans are calculated to amortize over a longer period than the due date of the balloon. A balloon, or lump sum, payment is required at the maturity of the loan to completely pay off the remaining principal. Therefore its important to keep in mind that the terms on a balloon mortgage are insufficient to completely amortize the loan.

Balloon mortgages can, and often do, contain a contractual opportunity to refinance at prevailing rates when the balloon payment is due. If the balloon mortgage loan has the option to be refinanced when the initial period expires, it will be called a convertible balloon mortgage. Some balloon mortgages come with “reset” clauses that provide for the original lender to reset the loan terms so that the loan is fully paid off in the remaining twenty three to twenty five years. The advantage of a balloon loan with a reset is that the loan payment will remain constant for the remaining life of the mortgage. The disadvantage is that the borrower is subject to the then current rates. If you are unable to convert or refinance the balloon mortgage, you may be forced to sell your home to make the loan whole. However, for the initial period of the loan, the interest rates on a balloon mortgage are usually a little lower than a comparable Adjustable Rate Mortgage.

Alternatively, with a fixed-rate mortgage you’ll have the benefit of knowing exactly what your monthly payments will be for the entire term of the loan. Because few people have the funds to fully pay off the balance due at the end of the balloon term, when using a balloon mortgage as the instrument of financing, the borrower should be concerned about future interest rates because they will be subject to them when the loan matures. However, most people that take out balloon mortgages assume that they’ll be moving within the term of the balloon period or that they will be eligible for a more attractive loan at the end of that period. Many people also use balloon mortgages to get that larger dream house. This strategy can, in fact, be fairly risky and a borrower should consider the market risk against the benefit of a larger home. Again, at the end of that period, the borrower must pay off the loan in full – this is the “balloon” payment. For example, a 7 year balloon calculated to amortize over 30 years will have low payments for 7 years and then the remaining balance will be due.

Before borrowing it’s important to consider whether you already have too much debt, whether you will be able to service the debt if you refinance at the end of the balloon period (or pay the balance), the risks associated with the current real estate market, and other factors as well. While it can be fairly easy to make the monthly payments on a balloon mortgage, it is very important to consider that there could be difficulty in managing the terms of the loan once it matures. In the current climate, fixed-rate mortgages are definitely the “loan of choice” for homeowners seeking a refinance mortgage, but if all the factors are considered and risks weighed, a balloon mortgage can be a viable alternative. Loan programs vary depending on the borrower’s credit, closing costs vary from state to state, work with your loan officer to get a proper estimate when you apply for your loan.