If your mortgage lender has sent you a letter demanding that you pay all of your back payments, as well as all late fees, penalties and legal fees in order to become current, then the process they are working with is called a reinstatement of your loan. Your lender views the delinquent amounts as defaulting on the terms of your home loan. This requires them to demand you catch up or they must foreclose on you and take your home. Can a home loan modification avoid this process and get you current without your having to pay this large amount? If the answer is yes, then why is this true? You may ask, what is the difference between reinstatement and modification of a home loan?
The demand for payment letter that a borrower receives is based on the terms of the loan. It only allows for paying the payment as described in your loan documents. If you are behind on your payments, you are still going to be held to the terms of your contract with the lender. There is no language in your loan to allow for changes. Therefore the lender has no other option other than collect or foreclose. You have fallen into default and the only contractual way to become current is to pay all past due amounts. Then your loan has become „reinstated“ and you can keep your home as long as you continue to make payments on time. This process is called reinstatement.
But, the problem with the reinstatement process is, that if you are too far behind then you will be unable to find enough cash to catch up all at once. The language of your loan, then triggers a foreclosure that you are unable to stop.
Unless….You are able to work out an agreement with your lender to „change“ the language and terms of your loan. This type of situation will call for „modifying“ your loan. You modify the terms to make it possible for you to continue owning and paying for your house. It would include interest reduction to lower your monthly payment and taking your unpaid payments and putting them back into your loan. The new terms would have the effect of creating new monthly payments, which would be affordable to you. Your monthly payments would now fit within your monthly budget.
Why would the lender do this? Because, your lender loses a great deal of money whenever they foreclose on a home. This is complicated, but the costs your lender must pay can include:
1. The cost of the foreclosure process going through the court system.
2. Your home will probably sell for less today that just a few years ago due to the economy. If your lender receives less than you owe them, then they lose this money.
3. Care of your home while it is in the selling process. This includes large realtor commissions, utility bills and upkeep.
4. The lender borrowed money from an even larger lender in order to loan you the money you used to buy your home. Your lender must pay this back.
5. While your home is in foreclosure or being sold, your lender cannot use it as an asset on the bank balance sheet. They are then criticized by government regulators.
Well what does your lender want? First of all, the lender wants you to catch up your payments on your own and get a reinstatement.. If that is not possible and you can identify the problems you have had that forced you to get behind, then the lender wants to work with you. The lender wants you to show what was wrong; what is different today; and what amount you can afford. Then they must see if they can make your plan work from their point of view.
If you can agree on terms that work for you both, then you can change the words, or terms, of your loan to incorporate the new agreement. You will not be getting a new loan or a refinance loan. You will do a „home loan modification“, which simply changes some of the terms of the loan, so that it now includes your new agreements.
Home loan modifications are done thousands of time per day, due to the present housing crisis. You can do it yourself, if you are familiar with the process. However, this can be tricky. I would interview several home loan modification process experts. Find out what they promise, what they charge and if they will take payments. For my recommendation see my resource box below.