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Nevada Foreclosure Relief Options – Understanding the Loan Modification

The mortgage crisis of the 21st century is unlike any financial crisis our nation has ever seen. When Nevada homeowners fell behind on their mortgage payments in days gone by, foreclosure was almost impossible to avoid. There were no consistent guidelines on how to deal with delinquent loans. The typical solution was to take the missed payments and late fees and add them to the loan – without changing any of the terms of the loan – which didn’t change the monthly payment. This didn’t help Nevada homeowners already unable to make their mortgage payments.

Today, thanks to the Home Affordable Modification Program (HAMP), Nevada homeowners have Loan Modification as an alternative to foreclosure.

A loan modification is a written agreement between the lender (usually the first mortgage lender) and the homeowner that permanently changes one or more terms of the mortgage note, usually making the payments more affordable. Almost every mortgage lender today has it’s own loan modification programs, as well as government programs such as HAMP (Home Affordable Modification Program).

Most loan modification programs include the following items:

• Interest rate reductions
• Adding missed payments to the loan balance
• Changing the type of loan from an adjustable-rate mortgage to a fixed-rate mortgage
• Extending the term of the loan (for example, a 30-year loan is extended to a 40-year loan)

The Making Home Affordable plan provided lenders with a consistent series of steps for modifying defaulted mortgages, known as the Standard Waterfall. The goal of the Standard Waterfall is to ensure that the mortgage payment is at or below 31% of the borrower’s gross monthly income.  The steps to apply the Standard Waterfall are explained below:

1. Request the last 2 paystubs for all borrowers on the loan (for all employment) to document proof of income, to be verified with the last 2 years tax returns and the last 2 months bank statements.
2. Calculate the monthly mortgage payment including property taxes, insurance, HOA fees if any. (Late fees due on the loan are specifically excluded.)
3. Calculate 31% of the total gross income for all borrowers. This is the new target debt-to-income ratio.
4. Reduce the interest rate on the loan in increments of 0.125% to get as close as possible to the target debt-to-income ratio as possible. It should be noted that the lender is not required under HAMP to reduce the interest rate under 2%.
5. If, after reducing the interest rate to 2%, the target debt-to-income ratio has not been reached, the term of the loan can be extended for up to 40 years.
6. If the target debt-to-income ratio is STILL not reached, the lender has the option to forbear principal on the loan. It is important to note, however, that the program does not require lenders to do this. What happens with the amount lenders forbear? No interest in this amount must be repaid, and it is a balloon payment that is due at the time the loan reaches maturity (end of the term of the loan).

Lenders receive incentives for every Nevada loan modification they successfully complete. After completing this analysis, the lenders run an analysis that includes the incentive payments they will receive for completing the loan modification. If the lender decides that the financial outcome is better for the lender by completing the modification, then they will modify the loan. This is typically the stage in the process where a borrower receives their trial-payment program, consisting of 3 consecutive payments that take the new terms into account. After they make the trial payments on time and the borrowers sign and return the documentation agreeing to the modification, the loan is permanently modified.

If the target debt-to-income approach cannot be reached, the next step is a Nevada short sale.