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Mortgage Refinance - Loan Modification: Preparing for Successful Payment Reduction

Updated on September 8, 2010

Creating a Mortgage Refinance Loan Modification Plan

Many of us have realized that falling behind on mortgage loan payments and going through foreclosure may be avoided in the first place by obtaining a modified loan. For others the desire to refinance is simply to cash in on the lower interest rates. Mortgage Refinance is a tricky business due to complicated laws and mountains of paperwork.  With each refinance comes a slew of new fees and documents.

Should You Modify Your Existing Mortgage Loan?

The bottom line is this – many people are underwater in their mortgages and have no choice but to look for loan modifications or just pack it up and let the foreclosure process destroy their credit rating and potential to buy in the near future.  Foreclosures are ugly but often unavoidable.  In today’s economic climate there are millions of families being pushed to the brink of economic collapse that is no fault of their own.

For other families fortunate enough to have survived the economic melt down a loan modification or refinance simply makes sense to take advantage of today’s record low interest rates.  For you the question is how much will it “cost” me to refinance and is this cost less than the amount I’ll recover by going through the process. Consider yourself lucky to benefit from the economic downturn.  You are in an enviable position.

Uncovering effective loan amendment tips that actually work is crucial to your being approved in either case.  You simply must be prepared.  A little preparation will save you a ton of time and potential grief.  The success rate of mortgage refinancing for those underwater is dismally low.  In this article, I'm going to share five useful tips which you can use to more readily qualify for a modified loan.

Five Pointers to Increase Your Probabilities of Mortgage Finance Approval

1. You must understand the lenders debt ratio formula. This is the ratio of your debt to your monthly family income. Debt to income is what lenders use to pre qualify all buyers and helps determine the ability to repay. The magic number is 31% as established by the Federal Government to be used as a guideline.  If your debt to income ratio is above 31% your chances of being refinanced diminish greatly.  So you’ll need to reduce your other debts to increase this ration thus increasing your chances.  Basically you’ll need $100 of income for every $31 of debt you have outstanding.

2. Create a compelling 'hassle' letter detailing exactly how you arrived in your current financial situation.  The point is to show the lender that your situation was not the result of irresponsible spending; rather you are a victim of circumstance that has fallen on hard times that are not a result of your acting irresponsibly.

3. Be ready to provide proof that while you can not pay your existing mortgage debt you can pay the new lower modified debt.  There is little incentive for lenders to refinance a loan if you can not pay the lower payment either.  A good way to accomplish this is to create a budget which shows how you have reduced your other expenses to free additional money for the new lower payment.  This is a tricky area, because if you create too much “new” budget income you’ll look like you can pay your existing income, but if you create too little again you likely will not be approved.  It’s a fine line.

4. Find professional help.  Yes this sounds like something you might hear from a late night infomercial, but it’s not.  That hardest part is not knowing what to do, let alone how to do it.  And there are some caveats as many loan modification companies are springing up.  The best suggestion we can give you is to work closely with long established business entities.  Check with your State to see how long a company has been in business and if there are any outstanding complaints on file.

5. Full disclosure.  You’ll need to provide evidence in the form of paper statements for your outstanding bills, and pay stubs or bank statements outlining your existing income sources.

Loan modifications are not easy to obtain unless of course you don’t really need them.  Banks have plenty of money to lend to people who don’t need it.  Ironic isn’t it that the less ability you have to pay the higher the “penalty” for taking a loan.  It’s risk/reward.  And high risk incurs the highest cost.  This is really a flaw in the system, but that’s how it is – so you must adjust and adapt.  Every time Uncle Sam creates a program that is supposed to help you it is usually so complex and difficult to understand that it becomes more an exercise in frustration and wasted time.  Few people are actually helped by the current Federal Government programs.  But few isn’t none

Refinancing your Home Mortgage - figuring out if you qualify
Refinancing your Home Mortgage - figuring out if you qualify

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