"In Part 1 of this article, I introduced the idea that the Net Present Value Test is preventing loan modifications with principal balance reductions. Listed below, I provide a comprehensive description of the TWO-PART loan modification test and how WEB PRESENT WORTH affects whether your loan adjustment is authorized or rejected.

What most customers do not comprehend is that a loan modification is more than just a basic change to the loan which makes the payments cost effective; it is a complex monetary analysis for the loan provider and the servicer. In fact, there is a two-part test that all loan adjustments should pass in order to be authorized by the loan provider (and receive federal government rewards). This is complicated and convoluted, but it's what every debtor needs to understand in order to comprehend why a loan adjustment might be doomed for failure before the procedure even begins.

1.Front-End DTI: First, to qualify for HAMP (the Treasury's ""Home Affordable Adjustment Program""), the borrower's existing payments for housing debt (i.e. principal, interest, taxes, insurance and association fees) should be ""unaffordable"" which suggests that those payments surpass 31% of the debtor's gross regular monthly income. This is referred to as the ""Front-End, Debt-to-Income Ratio."" This is generally not a huge hurdle because most customers in financial difficulty are paying well in excess of that 31% limit. However, some customers believe they need to reveal the lender that they have NO earnings. Because situation, the loan adjustment will be rejected right away since the customer requires to be able to reveal that a loan adjustment will decrease the Front-End DTI to at least 31%. If the customer has no earnings (or if the customer synthetically reduces his/her earnings), the loan provider merely can't do anything to get the payment to be ""budget friendly"" (there are limits to the interest rate decreases and term extensions which prevent limitless adjustments to reach price). Additionally, some new fidelity funding reviews borrowers currently pay less than 31% of their gross earnings toward their housing debt but have a lot of other expenses that they still can't pay for the home loan payment. These customers likewise fail the Front-End DTI test due to the fact that they are currently under the 31% limit (the lending institution does not care that you are overextended on non-housing financial obligation). So, as you can see, the customer has a narrow window in between making too much loan and not making adequate cash, within which the loan provider could provide an adjustment to the home mortgage (e.g. lower interest rate, extend term or minimize principal) which would change the loan from unaffordable (i.e. greater than 31% Front-End DTI) to budget friendly (i.e. equivalent or less than 31% Front-End DTI). Nevertheless, the assessment does not end here. This where the Net Present Worth test is available in to eliminate off the most efficient loan adjustment tool: the primary decrease.

2. Net Present Value (NPV): Next, the loan provider should figure out whether it will suffer a greater loss by offering a loan modification as compared to merely foreclosing on the house and selling it. The loan provider should find out which option (modification vs. foreclosure) offers the greatest Net Present Value to the lending institution. In both an adjustment and a foreclosure, the lending institution ultimately recoups a few of the money that was provided to the borrower. In a loan modification, the loan provider will receive monthly payments that include principal and interest (albeit, at a lower rates of interest than initially considered) over a period 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). Alternatively, in a foreclosure, the loan provider will end up offering the home either at a public foreclosure auction or as an REO (bank ""Real Estate Owned""), and, after paying the foreclosure and sales costs, the lending institution will have a lump amount of money which it can (ideally) re-lend to a new borrower at existing rates of interest. Again, an accounting professional can figure out just how much loan the lender will receive as a Net Present Worth from the foreclosure and sale. At that point, it ends up being a simple mathematical computation to determine whether the loan provider receives more loan through a loan adjustment or by foreclosing and selling the residential or commercial property. That's the Net Present Worth Test. Here's the problem for a borrower: If the lender has to substantially minimize the rates of interest, or extend the maturity date of the loan, or perhaps reduce principal, all in an effort to abide by the Front-End DTI test above (to attain that 31% target), it becomes MORE LIKELY that a foreclosure will offer a greater recovery than a loan modification. If so, the lending institution can not authorize the loan modification and must foreclose and sell the residential or commercial property. It is this unknown NPV Test that eliminates many loan modifications, and the borrower is not told why they don't certify.

So, as you can see, in scenarios where the loan provider need to minimize the primary balance of the home loan to the CURRENT MARKET VALUE to make the loan affordable, it is almost a mathematical certainty that the loan modification will stop working the NPV test.

A loan modification is not as clear cut as all those TELEVISION and radio commercials make it sound. There are ways to counter the severe result of the NPV Test. A skilled mediator can actually make a difference, but usually, an adjustment is SIMPLY NOT GOING TO WORK for the customer. You need to take a very close take a look at the numbers prior to you waste time and loan trying a loan modification. Furthermore, YOU MUST NEVER PAY ANYBODY AN UPFRONT COST FOR A LOAN MODIFICATION (See the California Department of Property for cautions relating to Loan Adjustment Frauds). The failure rate is so high that you are likely throwing loan away.

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