"In Part 1 of this article, I introduced the idea that the Net Present Worth Test is avoiding loan modifications with principal balance reductions. Below, I give an in-depth description of the TWO-PART loan modification test and how NET PRESENT WORTH affects whether your loan adjustment is approved or declined.

What most customers don't comprehend is that a loan modification is more than simply a basic modification to the loan which makes the payments affordable; it is a complex monetary analysis for the lender and the servicer. In truth, there is a two-part test that all loan adjustments must pass in order to be authorized by the loan provider (and certify for government incentives). This is complex and complicated, however it's what every customer requires to know in order to comprehend why a loan adjustment may be doomed for failure before the procedure even starts.

1.Front-End DTI: First, to qualify for HAMP (the Treasury's ""Home Affordable Modification Program""), the debtor's present payments for real estate debt (i.e. principal, interest, taxes, insurance and association fees) need to be ""unaffordable"" which means that those payments surpass 31% of the debtor's gross month-to-month income. This is referred to as the ""Front-End, Debt-to-Income Ratio."" This is usually not a huge hurdle due to the fact that a lot of borrowers in monetary trouble are paying well in excess of that 31% limit. However, some borrowers believe they need to show the lender that they have NO income. In that scenario, the loan adjustment will be declined instantly since the borrower needs to be able to show that a loan modification will decrease the Front-End DTI to at least 31%. If the borrower has no income (or if the debtor synthetically decreases his or her income), the lender simply can't do anything to get the payment to be ""economical"" (there are limitations to the interest rate reductions and term extensions which prevent endless changes to reach price). Alternatively, some debtors currently pay less than 31% of their gross income towards their housing financial obligation however have many other expenses that they still can't manage the home loan payment. These borrowers also stop working the Front-End DTI test due to the fact that they are currently under the 31% limit (the loan provider does not care that you are overextended on non-housing debt). So, as you can see, the debtor has a narrow window between making too much loan and not making enough money, within which the loan provider could supply a modification to the mortgage (e.g. lower interest rate, extend term or decrease principal) which would transform the loan from unaffordable (i.e. greater than 31% Front-End DTI) to inexpensive (i.e. equal or less than 31% Front-End DTI). Nevertheless, the evaluation does not end here. This where the Net Present Value test is available in to kill off the most reliable loan adjustment tool: the primary decrease.

2. Net Present Value (NPV): Next, the lending institution must identify whether it will suffer a greater loss by offering a loan modification as compared to merely foreclosing on the home and offering it. The lender must figure out which alternative (adjustment vs. foreclosure) provides the highest Net Present Value to the lending institution. In both a modification and a foreclosure, the loan provider ultimately recoups a few of the money that was lent to the borrower. In a loan adjustment, the lending institution will receive regular monthly payments that include principal and interest (albeit, at a lower rates of interest than initially contemplated) over a duration of 30 or 40 years. An accountant can look at that stream of 360 (or 480) month-to-month payments and determine 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 property either at a public foreclosure auction or as an REO (bank ""Property Owned""), and, after paying the foreclosure and sales costs, the lending institution will have a swelling amount of loan which it can (hopefully) re-lend to a brand-new customer at present interest rates. Once again, an accountant can figure out how much cash the loan provider will receive as a Net Present Worth from the foreclosure and sale. At that point, it becomes a simple mathematical estimation to figure out whether the lending institution receives more loan through a loan modification or by foreclosing and selling the residential or commercial property. That's the Net Present Worth Test. Here's the issue for a borrower: If the loan provider has to significantly decrease the rates of interest, or extend the maturity date of the loan, or even minimize principal, all in an effort to adhere to the Front-End DTI test above (to attain that 31% target), it ends up being MOST LIKELY that a foreclosure will supply a greater recovery than a loan adjustment. If so, the lending institution can not approve the loan adjustment and must foreclose and sell the property. It is this little known NPV Test that eliminates numerous loan modifications, and the debtor is not told why they don't qualify.

So, as you can see, in situations where the lending institution need to reduce the principal balance of the home mortgage to the CURRENT MARKET PRICE to make the loan budget-friendly, it is practically a mathematical certainty that the loan adjustment will fail the NPV new fidelity funding address test.

A loan modification is not as clear cut as all those TV and radio commercials make it sound. There are ways to counter the harsh result of the NPV Test. A proficient arbitrator can really make a distinction, however most of the time, a modification is SIMPLY NOT GOING TO WORK for the borrower. You need to take an extremely close take a look at the numbers prior to you squander time and loan trying a loan adjustment. In addition, YOU OUGHT TO NEVER EVER PAY ANYONE AN UPFRONT FEE FOR A LOAN MODIFICATION (See the California Department of Property for cautions relating to Loan Modification Rip-offs). The failure rate is so high that you are practically certainly tossing cash away.

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