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Posts : 589 Birthday : 1973-03-20 Join date : 2011-03-27 Age : 51 Job/hobbies : Doctor
| Subject: Best Equity Loan and loan modifivation faliure Sun Mar 27, 2011 6:01 pm | |
| Best Equity Loan and loan modifivation faliure
Loan Modification Failure – What Your Lender Isn’t Telling You About "NPV" And significant Reductions
In fragment 1 of this article, I introduced the notion that the fetch expose Value Test is preventing loan modifications with necessary balance reductions. Below, I give a detailed explanation of the TWO share loan modification test and how acquire indicate VALUE affects whether your loan modification is popular or rejected.
What most borrowers don’t understand is that a loan modification is more than fair a simple adjustment to the loan which makes the payments affordable; it is a complicated financial analysis for the lender and the servicer. In fact, there is a two-part test that all loan modifications must pass in order to be common by the lender (and qualify for government incentives) . This is complicated and convoluted, but it’s what every borrower needs to know in order to understand why a loan modification might be doomed for failure before the process even commences.
1. Front-End DTI: First, to qualify for HAMP (the Treasury’s “Home Affordable Modification Program”), the borrower’s fresh payments for housing debt (i.e. indispensable, interest, taxes, insurance and association dues) must be “unaffordable” which means that those payments exceed 31% of the borrower’s horrible monthly income. This is known as the “Front-End, Debt-to-Income Ratio.” This is usually not a grand hurdle because most borrowers in financial misfortune are paying well in excess of that 31% threshold. However, some borrowers fill they need to display the lender that they have NO income. In that status, the loan modification will be rejected immediately because the borrower needs to be able to reveal that a loan modification will lower the Front-End DTI to at least 31%. If the borrower has no income (or if the borrower artificially decreases his or her income), the lender simply can’t do anything to glean the payment to be “affordable” (there are limits to the interest rate reductions and term extensions which prevent unlimited adjustments to advance affordability) . Alternatively, some borrowers already pay less than 31% of their bad income toward their housing debt, but have so many other bills that they mild can’t afford the mortgage payment. These borrowers also fail the Front-End DTI test because they are already under the 31% threshold (the lender doesn’t care that you are over extended on non-housing debt) . So, as you can discover, the borrower has a narrow window between making too distinguished money and not making enough money, within which the lender could provide an adjustment to the mortgage (e.g. lower interest rate, extend term or gash famous) which would transform the loan from unaffordable (i.e. greater than 31% Front-End DTI) to affordable (i.e. equal or less than 31% Front-End DTI) . However, the evaluation doesn’t slay here. This where the rep reveal Value test comes in to ruin off the most effective loan modification tool: the distinguished reduction.
2. derive demonstrate Value (NPV) : Next, the lender must settle whether it will suffer a greater loss by providing a loan modification as compared to simply foreclosing on the home and selling it. The lender must figure out which option (modification vs. foreclosure) provides the highest find note Value to the lender. In both a modification and a foreclosure, the lender eventually recoups some of the money that was lent to the borrower. In a loan modification, the lender will receive monthly payments which include essential and interest (albeit, at a lower interest rate than originally contemplated) over a period of 30 or 40 years. An accountant can see at that stream of 360 (or 480) monthly payments and figure out what is it worth in “today’s” dollars (that’s called the “pick up expose Value” of a series of payments) . Alternatively, in a foreclosure, the lender will kill up selling the property either at a public foreclosure auction or as an REO (bank “sincere Estate Owned”), and, after paying the foreclosure and sales costs, the lender will have a lump sum of money which it can (hopefully) re-lend to a current borrower at unique interest rates. Again, an accountant can figure out how distinguished money the lender will receive as a rep demonstrate Value from the foreclosure and sale. At that point, it becomes a simple mathematical calculation to choose whether the lender receives more money through a loan modification or by foreclosing and selling the property. That’s the win note Value Test. Here’s the predicament for a borrower: If the lender has to significantly slit the interest rate, or extend the maturity date of the loan, or even carve valuable, all in an distress to comply with the Front-End DTI test above (to accomplish that 31% target), it becomes MORE LIKELY that a foreclosure will provide a greater recovery than a loan modification. If so, the lender cannot approve the loan modification and must foreclose and sell the property. It is this minute known NPV Test that kills many loan modifications, and the borrower is not told why they don’t qualify.
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john
Membership NO : 1 Posts : 1672 Join date : 2011-03-27
| Subject: Re: Best Equity Loan and loan modifivation faliure Tue Mar 29, 2011 12:09 am | |
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