Loan Modification Part 5 Negotiating new loan terms

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If you’ve gotten this far, congratulations! It means you’ve been approved as a loan modification candidate and the bank has or will be making you an offer very soon. This post will cover some ways to negotiate with your lender to get the best possible modified terms for your new mortgage.

What to expect from your bank offer

If the bank does approve you for a home loan modification there are a few constants that you must be aware of:

• The bank will not write down the principal balance of your loan, they will adjust your interest rate to lower your payments, but you’ll still owe the same amount on your mortgage.
• The bank will not waive late payments. These will usually be added to your principal and tacked on the back of the loan.
• The bank will require a good faith payment ranging from one to two month’s mortgage payment as a sign of good faith that you’re committed to the mortgage.
• The bank will demand that you have the ability to afford a reasonable market interest rate as part of your modification. (You won’t be negotiating for 1% when the going rate for a 30-year fixed is 6.25%.)

What you can negotiate

• Interest rate. Your interest rate will typically be reduced between 2% and 4%. If you’re interest rate is currently 9% after an ARM adjustment, you can negotiate for a 6% 30-year loan fixed for 5-years no problem. You will have problems negotiating for a 3%. It’s not going to happen.
• Post-modification adjustment cap. After a fixed period (typically 5 years) your modification will expire and your rate will become adjustable again. You can negotiate the cap of your adjustment. Say if you agree to a 6% loan you can negotiate a cap at 8% or something similar to protect you from a similar reset disaster in the future.
• Good faith payment. Every bank will require a good faith payment of some sort to get caught up with delinquent payments before they go through with a loan modification. This is typically one to two months of mortgage payments. If you’re in a bind this may not be feasible. You can often negotiate this down to half a mortgage payment. Either way you’ll need to make some sort of payment – be prepared for that.

Take yourself out of the equation emotionally

Your home is an emotional asset. Your family lives there, it holds your memories, etc. Do not let you emotions get in the way of negotiating. Use these tips to be a better negotiator with the bank:

• Have a game plan. Have a hoped-for mortgage payment and interest rate so that you know what you’re negotiating for. Stick to your guns and be firm on the terms so you can get the best deal possible.
• Keep a calm demeanor and realize you’re working with another human who can either help you or make your life hell. Work to make them want to help you more.
• Be polite, yet assertive. If you don’t agree with something speak up and voice your objection. Be polite, but know what you want and stick to your guns.
• Appeal to people’s sense of fairness. Use terms like “doesn’t that seem fair?” or “isn’t that reasonable?” People have a hard time objecting to something that seems fair or reasonable.
• Get something if you’re asked to give something. Quid pro quo is fine here. If you’re asked to give something up (like a slightly higher monthly payment) then ask for something in return – a lower good faith payment, for example.
• Document everything. Don’t get stuck in a game of he said, she said. Write down offers so that you have a record of what’s on the table at any given time.
• Elevate to a decision-maker. Feel free to ask to speak to a manager or supervisor if you’re dissatisfied with your progress.

Negotiate to a point where you’re in the target range of your hoped for mortgage payment and interest rate and good faith payment. Once you’re there take the offer. No need to get greedy when your home is on the line. Next we’ll talk about wrapping up your loan modification.