Loan Modification

You know what a mortgage is, how it works, and what to watch out for. But when you go asking for mortgage assistance, your lender’s words make about as much sense as alien banter. That’s what makes the Loan Modification process so confusing for many homeowners—and why many of them simply give up.

But you don’t have to be a financial expert to make sound decisions. A working knowledge of the lending and loan modification industry can help you better understand your situation, and know exactly what your lenders mean. Below is a list of terms you’re likely encounter in a loan modification, and what they mean for you.

Amortization: The repayment of a loan (usually a mortgage) through regular installments. The payments are determined by the term of the loan, the principal balance, and the interest rate.

Annual Percentage Rate (APR): The total cost of the loan, including the interest, mortgage insurance, points, and other associated fees.

Adjustable-Rate Mortgage (ARM): A type of mortgage in which the interest rate changes according to market conditions. This means your payments may increase or decrease from month to month. Most ARMs have a payment cap that keeps the amount from rising beyond certain levels.

Debt-to-income ratio (DTI): The ratio of the amount you pay on the loan to your total income. Lenders use this to determine whether or not you can comfortably pay the loan. According to the Federal Housing Administration (FHA), the mortgage payments should not exceed 29% of your monthly income before taxes, and your total debt (including credit cards and other loans) should not go over 41%.

Deed-in-lieu: A deed that passes interest in your property to your lender as settlement for your debt. It doesn’t let you keep your home, but it helps you avoid the foreclosure proceedings and associated costs.

Equity: The amount of financial interest you have in your own property. This is calculated by subtracting the amount you still owe from your home’s fair market value.

Fair market value (FMV): A theoretical price given to your home considering the current market conditions. The FMV assumes that the buyer and seller are acting freely and have all the pertinent information for the deal.

Fixed-rate mortgage: A type of mortgage that uses a fixed interest rate throughout the term of the loan. This gives you more stability as a borrower, as your payments will remain the same regardless of the market figures.

Foreclosure: A process wherein your property is sold off and the proceeds go to your lender, allowing them to recover their losses when you default on the loan.

Forbearance: An agreement in which your lender revises your payment plan to help you get current and avoid foreclosure. This may involve lowering your monthly payments or suspending them for a given period. Unlike loan modification, this is usually temporary and is often used as a loss mitigation option.

Good faith estimate (GFE): An estimate of the total cost of the loan, including all the closing fees, lender charges, and insurance costs. All lenders are required to give you a GFE within three days after you apply for a loan.

Interest: A percentage of the principal added to your monthly fees, as a way of paying your lender for the use of money.

Interest Only: A loan structure in which you only pay interest for the life of the loan, and pay the principal only after a given period.

Lien: A claim held by your lender against your property as a form of security in case you default on the loan.

Loan-to-value ratio (LTV): The ratio of the total amount you pay on the loan to the actual price of your home. The higher the LTV, the less you have to put out as down payment.

Loss mitigation: A process that helps borrowers to avoid foreclosure and lenders to minimize their losses on delinquent borrowers. When you fall behind or apply for a loan modification, your lender’s Loss Mitigation office will handle your case and make the decisions.

Mortgage banker: A firm that resells loans to secondary lenders, such as Fannie Mae and Freddie Mac.

Mortgage broker: A person or company that serves as a mediator between agents, buyers, sellers, and mortgage lenders. Brokers are paid by a percentage of the amount earned by the lender or seller. Lenders are required by law to disclose all fees paid to brokers and other parties, so you can be sure they’re not making kickbacks at your expense.

Mortgage insurance: An insurance policy that helps minimize losses for your lender in case you fail to keep up with payments. This is usually required for borrowers who make a down payment lower than 20% of the purchase price.

Principal Balance Reduction: A type of loan modification in which your lender reduces your principal balance to lower your monthly payments. Lenders usually grant this only to people from heavily depreciated areas, or when the amount they write off is still lower than the cost of foreclosing on your home.

Refinancing: A process wherein you take out one loan to pay off another. This allows you to enjoy better loan terms, such as a lower interest rate or a more stable structure.

RESPA: Real Estate Settlement Procedures Act. This is a law that requires all lenders to give you a Good Faith Estimate (GFE) of the loan and disclose all the fees involved. It also gives you the right to dispute any fees or even cancel the loan within a reasonable time frame.

Short sale: A common alternative to foreclosure. In a short sale, you sell the home for less than its fair market value, and give the proceeds to your lender as payment for the home. Although it won’t let you keep your home, it’s less damaging to your credit than a foreclosure.

Teaser Rate: An introductory interest rate offered on many mortgages to draw in borrowers. After the introductory period, the interest reverts to normal rates, increasing your monthly payments for the rest of the loan.

Teaser Rate: A temporary rate reduction at the inset of a loan.

TILA: Truth in Lending Act, also known as the National Consumer Credit Protection
Act. This law requires lenders to give you complete information about the terms and total cost of the loan.