Disclaimer: The following are not intended to give legal advise, but are general summaries of the law and procedure for information purposes only and are subject to revision without notice. Each and every situation is unique and you should not rely on the following, but seek a legal counsel regarding your individual situation.
Federal and State Governments have enacted legislations and programs to ease the loan modification process for those that qualify.
Under the Federal Foreclosure Alternative Program, lenders who are part of this program can only require streamlined and standardized documents.
As a rule of thumb, the documents should support a borrower's ability to pay a mortgage payment which equals about 38% of the borrowers gross income (reduced down to 31% for certain government investor loans). However, the interest banks will approve will usually not fall below 3%.
In most cases, the lender will NOT reduce the principal, and initially approve the reduced payment for a short period of time (3 to 6 months), and then if the borrower makes these payments on time, extend the reduced payment amount to three to five years.
As such, what will happen after three to five years? Unless property values increase significantly, the borrower will be in the same situation again. As such, in many cases, it may be wiser to allow the property to foreclose or sell the property now through a short sale, and move on. Every situation is unique and your individual circumstance should be evaluated.
One final note is that in California, it is unlawful for attorneys, realtors, or any loan modification companies to charge an upfront fee for initiating or processing a loan modification. If a borrower chooses the loan modification route, there are Government and lender approved agencies which can assist a borrower for little or no fee.
Loan Modification may or may not be your best answer. Borrowers should not be misled by unwarranted promises, such as the following:
False Scenerio 1: "Through loan modification, your payment may be reduced to half, or more, and your principal balance can be negotiated down to the current value of your home. For example, $2500 payment reduced to $500, with great principal reduction.
False misrepresentations such as the above have flooded the industry and everyone from attorneys, realtors and loan modification companies have been charging upfront fees for loan modifications when it should have been obvious that the borrower would not have qualified for a loan modification. In most cases, the loan modifications were not approved and the borrowers were out several thousand dollars in fees.