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Loan Modification vs. Bankruptcy


Atty. Paul Allen

If you are having a hard time making ends meet and paying your monthly mortgage, you may wondering what to do. People who are having a hard time making their mortgage payments often rely heavily on credit cards, which eventually reach their limit. This of course creates even a bigger problem. While a loan modification may a good option for you, a high debt to income ration can prevent you from qualifying.

Loan modifications are very desirable for cash strapped homeowners suffering financial hardship. Lenders will often be agreeable to renegotiate the terms of your existing home loan, if they know that would keep you in the home and avoid a foreclosure. This could be a reduction in interest rates, or a change in terms of the loan. Under certain circumstances, it is even possible to obtain a principal reduction of the loan balance. Your lender does not want your home to go into foreclosure, because it will accrue a significant loss if the property value is less than the amount owed.

Home owners trying to get their loan modified, frequently consider bankruptcy too. A common scenario arises in this situation. When you apply for a loan modification, the mortgage lender will look at your debt to income ratio. The lender will want to see that if they reduce your mortgage payment you will still be able to make your house payments in full and on time. If you have a high degree of credit card debt, a lender may feel that even with a reduced mortgage, you may not be able to make your house payment. What the lender is saying in this case is that your debt load is so high, you cannot afford to keep your home. The lender in this case could foreclose on the property (assuming that you are behind on your payments).

Keep in mind that mortgage lenders do not want to foreclose on a property, and it is usually considered a last resort. However, once a Notice of Default is filed, the statutory period starts running. After 90 days have passed, the lender only has to give 21 days notice of a Notice of Trustees Sale. These time frames are pursuant to California statutes, each state may vary. Filing for bankruptcy will halt the foreclosure process. A skilled bankruptcy lawyer would be invaluable at this point, and could advise you to file for bankruptcy, which can buy you valuable time to explore other options. He could also tell you that if the current market value of your home is less than the amount of the first mortgage, your second mortgage can be “stripped down,” or removed.

If you are preparing to file for a loan modification, it is important to discuss your plans with a bankruptcy lawyer. Together you can analyze your current debt to income ratio, and make adjustments prior to applying for a loan modification. Consolidating or eliminating debt where at all possible may make just the difference in obtaining a loan modification. Your mortgage lender will also want to see that you are employed, and have a steady income so that you will be able to pay your mortgage payment. Your lender will also want to be assured that whatever caused your initial financial hardship has been addressed, and it is behind you.

Dealing with financial problems is never easy. However, there are actions you can take to help you through the process and help put your financial problems behind you.

Call attorney Paul M. Allen and schedule a free consultation on your financial options.

(This article is for information purposes only, and does not necessary reflect the company’s opinions and views on general issues. We make no warranty, prediction nor representation, nor do we assume any legal liability for the completeness of any information and its effect on any case. Each case is different and results depend on the facts of each case. Consult with and retain counsel of your own choice if you need legal advice.)

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