As I’ve been trying to do, I am taking questions that I frequently get from homeowners about home loan modifications on a daily basis and I’m trying to answer those questions for everyone.

What I think has probably been the most difficult part about home loan modifications for homeowners is that they don’t really understand it. For refinance loans, you know the interest rates, you ratelock your loan and you typically close in 3-4 weeks from the ratelock date.

However, for loan modifications there is no locking into a certain rate or payment. Each lender has different guidelines they follow to determine how much they are willing to modify the loans for homeowners. This isn’t information that is easily accessible and it usually takes a minimum of 6-8 weeks before a home loan modification is finalized. Sometimes its faster or longer depending on the circumstances for that specific homeowner.

Now back to answering the question in the headline…are mortgage lenders reducing principal balances for homeowners? I can only speak for my company and we have been able to get principal reductions for clients. However, it is not easy and it is not a common occurrence. To homeowners, they think that if the house has gone down a significant amount then the lender should understand why the homeowner is not open to paying a high mortgage payment on a home that is worth much less than the total amount of the mortgage loans.

While it seems like it should be a no brainer, the reduction of principal balance isn’t necessarily a decision that the bank can make. The majority of banks/mortgage lenders sell your loan to a 3rd party investor. These investors have to 1) agree to a home loan modification and 2) determine how much of a modification they are willing to give. In the majority of cases this is a lower rate and lower payment while other situations lead to a principal reduction. A principal reduction is always the last option a bank is willing to consider and they will never do it if your home value and loan amount are the same or if you have even the smallest amount of equity.

No matter what, the goal is to modify your loan so the payment is comfortable enough for you to be able to persevere through this economy and keep you in your home. While it seems like the economy will never get better, it will turn around eventually, so if you can modify your payment to get through this rough patch then the future will not look quite as dark.