Imminent Default Cases Get a Nod at Loan Modification

On Friday, January 22, the Federal Housing Authority opened its doors to borrowers with FHA-insured mortgages facing imminent default to qualify for loan modification. Previously, only delinquent borrowers are able to apply for modification assistance, which drove many homeowners current with their mortgage payments to go into intentional default to get their lender's attention.

Hope continues to rise for the distressed American homeowner. Just this Friday, January 22, HUD made another welcome announcement enabling distressed homeowners with FHA-insured mortgages to qualify for loss mitigation assistance even before they go into default. Previously, a homeowner can only be eligible for such assistance after they had missed a series of payments on their monthly mortgage dues.

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The Helping Families Save Their Home Act of 2009 signed into law by President Obama widened the scope of the Federal Housing Administration's authority, empowering it to include borrowers who are facing "imminent default". Guidelines were issued to loan servicers Friday, setting the parameters on how assistance is to be provided before homeowners get into default.

Existing FHA guidelines prior to Friday's announcements had only required lenders to communicate with borrowers after the latter had missed a payment. By law, lenders have to initiate action to confer with their borrowers so they get an explanation for the delinquency and assess reinstatement options. But with this new expansion of FHA's authority, loan servicers will now have additional options to offer homeowners who seek assistance before they go into default.

Previously, a lot of homeowners would intentionally go into default so they get the attention of the lenders. It was a "negative attention is better than no attention at all" thing. No other option was available for them to communicate their quandary in keeping up with their monthly payments. As the saying goes, "If you can't beat them, join them!"

So effective immediately, forbearance as a loss mitigation option can now be applied to assist borrowers facing imminent default. FHA defines the term "borrower facing imminent default" to be one who is current or less than 30 days past due on his mortgage obligation, and is experience a significant reduction in income or some other hardship that will prevent him from making the next required payment.

Under the FHA's forbearance program, loan servicers can allow the postponement, reduction or suspension of payments due on a loan for a specific limited time period. The agency allows qualified FHA-insured borrowers to lower their monthly dues to an affordable level through a permanent reduction using partial claim in combination with a loan modification. Partial claim defers repayment on a portion of the mortgage principal through an interest free secondary mortgage that isn't due until pay-off on the first in completed. Then the remaining balance is modified through re-amortization or interest reduction.

As in all case scenarios, the borrower must be able to attest to the cause of imminent default through proper and complete documentation. Probable causes include unemployment or a pay cut, any change in household financial circumstances such as death in the family, serious illness, divorce or any other condition that can cause a drastic drop in household income. Of course, such cases should be verifiable.

On the loan servicer side, parameters used to determine that a delinquency is imminent should also be outlined and documented. All pertinent documentation to their conclusion should always be retained and must include information on the borrower's financial condition.

If you're a homeowner facing imminent default, you no longer need to miss your monthly payment intentionally to get your lender's attention. Start saving your home now by gathering all relevant documents you will need to put together a loan modification application. You can do it yourself with several options available.

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