Principal Reduction During Loan Modification?

You may not get a principal reduction during loan modification. A principal reduction would not wipe out fees and interest from your loan.

Q: My lender told me I do not qualify for principal reduction on the loan I have with them. I contend that I am not asking for principal reduction but, rather, I am asking them to waive the fees and interest that I have not paid while I negotiated a loan modification while my foreclosure process moved on.

What do I call this? The amount in question has not yet rolled into the principal. I’ve documented all of my efforts and all of the bank’s misleading behavior. I understand you are not providing legal advice. I just want your opinion.

A: Lenders are generally entitled to receive a monthly payment on what you owe on a loan. Usually that payment is part repayment of the principal you owe and part interest on the loan. If you stop making payments, the amount of principal on the loan does not go down, but the lender can add the interest and other fees the lender incurs in attempting to collect the debt.

We’re not sure what you’d want to call it, but it certainly seems reasonable from a lender’s perspective to add the amount you failed to pay to the loan balance. If you haven’t paid your mortgage payments for some time, or at least not the entire payment, you can’t claim that you didn’t owe it or that the amounts you didn’t pay shouldn’t be billed to you.

If you had received cable service and used the service for the last twelve months but had not paid the cable company, you’d expect the cable company to add up the amount for the last twelve months, along with late fees, and bill you for it.

The real question you are asking is whether the lender would be willing to modify your loan and wipe out some of what you owe the lender – whether the amount you owe is characterized as principal or otherwise.

The key issue for you is where you end up. Are you going to wind up with a loan modification that meets your financial needs and allows you to remain in your home or are you going to lose your home to foreclosure?

If you want to keep the home and the economics of the loan package they are offering work for you, you might want to take the deal no matter how the fees and costs are characterized. The truth is that for many borrowers we have encountered, their lenders’ efforts to help them usually don’t succeed. One of the reasons they fail is that some borrowers can’t afford their mortgages no matter how low the payments go. Others lose jobs they had just acquired. Others have other issues that pop up and the mortgage becomes affordable.

What will be interesting to see is what happens over the next four years, as the loan modifications step up the interest rate from 1 percent to 5 or 6 percent for many borrowers. Should the economy not make a full recovery by then, we could see another big wave of foreclosures as folks lose their jobs or are unable to cope with higher mortgage payments.

What you really need to know is what deal the lender is offering you. Don’t focus on what the fees and other costs are called. You need to know your current loan balance, what your new loan balance will be with the unpaid interest and fees, what your new interest rate will be, if your interest rate will be fixed for the term of your loan or if it rises to a higher rate, what your monthly mortgage payment will be and how long the lender will give you to repay the loan.

If you know the answer to these issues, you can then decide if the loan package they are offering you will work or not. If it doesn’t work, you will need to decide what to do going forward with this lender and your home.


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