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QUESTION: What is a loan modification?
Answer: Loan modification is a legal process whereby the terms of the mortgage contract are permanently changed to make payments more affordable to the borrower. Loan modification may include reducing the interest rate, extending the term of the loan from 30 to 40 years, or adding missed payments to loan balance. Modification may also involve reducing the principal balance of your mortgage by canceling or forgiving a portion of the mortgage debt.
Question: Is the portion of mortgage principal reduced through loan modification taxable as income?
Answer: Under the Mortgage Forgiveness Debt Relief Act of 2007, the forgiven debt may be excluded from income in calculating the federal tax you owe, but it still must be reported on your federal tax return.
Question: What should a borrower have to show to qualify for loan modification?
Answer: Lenders are not obligated to modify a loan. The lenders motivation in modifying a loan is that this is a better alternative to foreclosure. The borrower must show hardship in making payment as a result of long-term reduction in income or increased payment under ARM. Borrower should also be able to show good-faith effort to pay the mortgage.
Question: Why is some loan modification applications denied?
Answer: Some applicants are denied because they cannot prove that there is sufficient income to pay the mortgage after it is modified. Others were denied because they could not show any hardship in their income and expense worksheet.
Question: Will negotiating loan modification through an attorney give more favorable terms?
Answer: Attorneys are trained in negotiation and are likely to get more favorable terms. Loan modification is a legal process. Lenders will pay special attention to attorneys’ modification proposals because of the threat of court litigation if negotiation fails. Court litigation is expensive to lenders and they do not want to waste time on litigation.
Question: Will filing of bankruptcy stop foreclosure?
Answer: Yes. Filing bankruptcy is generally considered as the option of last resort. A bankruptcy stays in your credit report for 10 years. It can make difficult to get credit to buy another home, get life insurance or sometimes get a job.
Question: Who may qualify to loan modification?
Answer: You may qualify if you have any of the following:
Your Mortgage Loan is substantially more than the value of your home.
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