Important things to consider before you request a LOAN MODIFICAION.

1.-What is your hardship? Loss of income, medical condition, job transfer, or any other unforeseen situation? Lenders require a hardship. A complete loss of job is not acceptable because you must have some income in order to qualify for a LOAN MODIFICATION REDUCTION. You do not have to have equity in order to qualify for a loan modification.

2.-Are you late on your payments? Being late is not required but it helps as most lenders will concentrate on the delinquent borrowers first. The squeaky wheel gets the grease.

3.-Is you loan modification company or representative asking you for up front fees?

Be careful. Prepaid fees are not acceptable in the state of California. All paid fees have to be earned fees. A reputable company should ask you to sign a service agreement where you are liable for service fees only if a LOAN MODIFICATION AGREEMENT has been mutually accepted by you and your lender. Remember only your lender has the authorization to approve the LOAN PAYMENT REDUCTION.

4.-The most important items you will need in a loan modification are the hardship letter and the financial worksheet. If you need help filling out this forms, most professionals will assist you in filling out these documents for $50.00 clerical fee each.

5.-Do not pay up front fees or document preparation fees if your lender has not indicated to you that they are willing to review a LOAN MODIFICATION PLAN.

6.-The most important tip here is that most individuals can negotiate the LOAN MODIFICATION AGREEMENT directly with their lenders. Remember the lender is the one that has the last say. Not the attorney or the loan modification “expert”. Half of the borrowers that have completed a successful loan modification, have done it on their own directly communicating with the lender. You need lots of patience and perseverance.

If you don’t have time to communicate with your lender, some Professionals in this field are willing to do it for $700.00 or less due at completion of a successful loan modification agreement. If you pay more than that for a negotiation of your MORTGAGE PAYMENT REDUCTION, you are paying too much.

7.-The reason that even the most expensive attorney can not guarantee the loan modification acceptance is that the loan modification process is not mandatory yet. At this time only participating lenders are willing to work with borrowers.

8.-Remember you must have income to prove that you can use at least 31% to 38% of you income to pay for the new negotiated monthly payment, and allocate the rest of your income to pay for regular basic necessities like food, clothing, transportation, and utilities. In other words, if your current income is $4000.00 per month, your new monthly mortgage payment may be reduced to $1520.00 per month. However if your income is not significant the lender will not negotiate a payment reduction because of your inability to pay the loan.

9.-Tax consequences? Yes and no. If the loan modification entails an interest rate change only, there are no major impacts in your tax return. You will loose a small interest expense reduction on your schedule A due to the fact that you will pay less interest during the year but who cares, you are saving more in interest. You are dropping quarters to pick up dollars.

Some of the most poular loand modifications are the ones recently approved by the FDIC. Most lenders and investors follow these guidelines to approved other dellinquent loans into new modified loans:

What if I have a loan modified where a loan principal was reduced or discounted? In this case you may have canceled debt income which is taxable as ordinary income. This income may be excluded from your taxable income if the loan was secured by your principal residence or main residence. It may also be excluded if you were financially insolvent at the time you had your debt canceled. TIP. You do not have to file bankruptcy in order to prove to the IRS that you were financially insolvent. The amount which was reduced from the principal loan balance is your total canceled debt amount. If you filed title 11 bankruptcy, you may exclude this amount form income. You may qualify for one of those three options but not for all three. You will have to file IRS form 982.

If you were financial insolvent immediately before the cancellation of debt, you may also exclude the canceled debt income from your taxable income. For IRS purposes, you were financial insolvent if your total liabilities exceeded your total fair market value of your total assets. Total assets include the properties you used as collateral to secure the loans in question and other assets such as pension plans and retirement plans.

You must file form 982 to exclude canceled debt income from your taxable income. This gets a little more detailed and you may need a registered tax prepared or a CPA.  

For more information on this topic please see IRS PUBLICATION 4681 or call our office.

Author,

Armando Hurtado,
Registered Tax Preparer, and Realtor