"In Part 1 of this post, I introduced the concept that the Net Present Worth Test is avoiding loan modifications with principal balance decreases. Listed below, I offer a comprehensive explanation of the TWO-PART loan modification test and how INTERNET PRESENT WORTH affects whether your loan adjustment is authorized or turned down.

What most debtors don't comprehend is that a loan modification is more than just a simple change to the loan which makes the payments cost effective; it is a complicated financial analysis for the lending institution and the servicer. In reality, there is a two-part test that all loan modifications should pass in order to be approved by the lender (and receive federal government incentives). This is complicated and convoluted, however it's what every debtor needs to understand in order to comprehend why a loan adjustment might be doomed for failure prior to the procedure even begins.

1.Front-End DTI: First, to qualify for HAMP (the Treasury's ""Home Affordable Modification Program""), the borrower's present payments for housing debt (i.e. principal, interest, taxes, insurance coverage and association dues) should be ""unaffordable"" which suggests that those payments go beyond 31% of the borrower's gross month-to-month income. This is called the ""Front-End, Debt-to-Income Ratio."" This is generally not a big obstacle since most borrowers in monetary problem are paying well in excess of that 31% threshold. However, some customers think they require to reveal the loan provider that they have NO earnings. Because situation, the loan adjustment will be turned down immediately because the customer needs to be able to reveal that a loan modification will decrease the Front-End DTI to a minimum of 31%. If the customer has no earnings (or if the debtor artificially reduces his/her earnings), the loan provider just can't do anything to get the payment to be ""cost effective"" (there are limits to the interest rate decreases and term extensions which avoid endless changes to reach cost). Alternatively, some customers currently pay less than 31% of their gross income toward their real estate financial obligation however have many other expenses that they still can't pay for the home mortgage payment. These debtors also stop working the Front-End DTI test since they are currently under the 31% threshold (the loan provider does not care that you are overextended on non-housing financial obligation). So, as you can see, new fidelity funding address the debtor has a narrow window in between making excessive loan and not making adequate loan, within which the lender might offer a change to the home mortgage (e.g. lower rate of interest, extend term or minimize principal) which would change the loan from unaffordable (i.e. greater than 31% Front-End DTI) to economical (i.e. equal or less than 31% Front-End DTI). However, the assessment does not end here. This where the Net Present Value test comes in to eliminate off the most reliable loan modification tool: the primary reduction.

2. Net Present Value (NPV): Next, the lender should figure out whether it will suffer a greater loss by supplying a loan modification as compared to just foreclosing on the home and selling it. The loan provider needs to find out which alternative (modification vs. foreclosure) supplies the greatest Net Present Value to the loan provider. In both a modification and a foreclosure, the lender ultimately recovers some of the loan that was lent to the debtor. In a loan adjustment, the lending institution will receive regular monthly payments which consist of principal and interest (albeit, at a lower rate of interest than originally considered) over a duration of 30 or 40 years. An accountant can take a look at that stream of 360 (or 480) month-to-month payments and find out what is it worth in ""today's"" dollars (that's called the ""Net Present Value"" of a series of payments). Additionally, in a foreclosure, the lending institution will wind up offering the residential or commercial property either at a public foreclosure auction or as an REO (bank ""Property Owned""), and, after paying the foreclosure and sales costs, the lender will have a swelling amount of loan which it can (ideally) re-lend to a new customer at present interest rates. Once again, an accounting professional can figure out just how much money the lender will receive as a Net Present Value from the foreclosure and sale. At that point, it ends up being an easy mathematical estimation to identify whether the lender gets more loan through a loan modification or by foreclosing and offering the residential or commercial property. That's the Net Present Worth Test. Here's the problem for a borrower: If the loan provider needs to substantially minimize the rate of interest, or extend the maturity date of the loan, and even minimize principal, all in an effort to abide by the Front-End DTI test above (to achieve that 31% target), it becomes MOST LIKELY that a foreclosure will provide a higher recovery than a loan modification. If so, the loan provider can not approve the loan adjustment and should foreclose and offer the home. It is this unfamiliar NPV Test that eliminates lots of loan modifications, and the customer is not told why they don't qualify.

So, as you can see, in circumstances where the lending institution must reduce the primary balance of the home loan to the CURRENT MARKET VALUE to make the loan budget-friendly, it is nearly a mathematical certainty that the loan modification will fail the NPV test.

A loan adjustment is not as clear cut as all those TV and radio commercials make it sound. There are ways to counter the harsh outcome of the NPV Test. A competent arbitrator can in fact make a difference, however typically, a modification is SIMPLY NOT GOING TO WORK for the customer. You must take a very close appearance at the numbers before you lose time and money trying a loan adjustment. Additionally, YOU OUGHT TO NEVER EVER PAY ANYONE AN UPFRONT FEE FOR A LOAN MODIFICATION (See the California Department of Property for warnings concerning Loan Modification Frauds). The failure rate is so high that you are likely throwing money away.

Please call us so we can describe the TWO-PART loan modification test in more information and how it applies to you and your home mortgage. We do not charge for this consultation."