According to RealtyTrac, 1 in every 163 Las Vegas housing units received a foreclosure filing in December 2011. No doubt, many more have distressed mortgages - loans on which borrowers are in danger of default. Job loss and underemployment are major factors. With Las Vegas unemployment rates hovering around 12.5 percent at the end of 2011, according the U.S. Dept. of Labor, this trend is likely to continue. Others find themselves underwater because of the steep decline in home values. Unable to sell the homes they can no longer afford, distressed homeowners quickly run out of options. Those who want to remain in their homes should consider a mortgage loan modification.
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In order to qualify for a modification, the mortgage payment must exceed 31 percent of the homeowner's gross monthly income. The homeowner must also have suffered a hardship that makes it unlikely that they'll be able to resume making their current payments in the foreseeable future.
Homeowners seeking help must jump through hoops to get their modifications approved. The modification might consist of a reduction in interest rate, an increase in the term of the loan or a reduction in the principal balance. The vast majority of modifications reduce the interest rate or extend the loan. Few reduce the principal, but lenders are starting to understand a principle reduction is necessary to entice homeowners into keeping their home.
Modifications are available under a number of government-backed and private lender programs. The first step in a comprehensive strategy to get a modification approved under any of these programs is to prepare a hardship letter explaining the reasons why the loan is no longer affordable. The lender is likely to request documentation - copies of medical bills, for example - to support the hardship claim.
The more specific a homeowner's request for a modification, the more likely the lender is to grant it. The best strategy, then, is to be precise and realistic. This means that a good deal of number-crunching is necessary.
Since a modification isn't even on the table unless the mortgage payment is more than 31 percent of gross household income, the homeowner must total the gross income and multiply it by.31. If the result is less than the current mortgage payment, the homeowner should find the interest rate that reduces the payment to 31 percent. This is easily accomplished with an online mortgage amortization calculator. Entering the principal balance, taxes, insurance, the current interest rate and the time remaining on the loan returns a payment amount. Reducing the interest rate entered 1/4 percent at a time until the target payment is reached gives the homeowner a specific interest rate to request in their modification application.
The next hurdle is ensuring that total debt payments are less than 70 percent of gross household income. This is determined by adding the amounts of all debt payments, including the mortgage, and dividing the total by the gross monthly income. For example, if the payments total $3,000 and gross monthly income is $6,000, the homeowner would divide 3,000 by 6,000 to arrive.50, or 50 percent. This is less than the 70 percent maximum. However, it's still high, which indicates a substantial risk of default. It's important to find a happy medium - a percentage that proves hardship but not such a severe hardship that it can't be overcome with a modification.
The target interest rate may need to be adjusted in order for a modification to reduce the debt payments enough to bring their percentage to a safer target level of about 40 percent. As a backup, the homeowner can use the amortization calculator to see how extending the term of the loan affects the outcome. It's possible that a combination of reduced interest rate and lengthened term will be required to make the loan affordable. In extreme cases, a principal reduction might be needed as well.
Although many homeowners represent themselves in the negotiations with their lenders, help is available for those who need it. A cottage industry of loan modification attorneys and consultants has developed in Las Vegas because of the high number of defaults there. These individuals can negotiate on a homeowner's behalf or offer advice to help the homeowner negotiate more successfully on their own.
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