What is a Loan Modification?

While relatively new, the term "Loan Modification" is becoming increasingly familiar to homeowners as adjustable rates rise, property values fall, and economic uncertainty persists. As housing sales have fallen and mortgage re-financings have become much more difficult to qualify for, loan modifications are the only thing standing between millions of homeowners and the aspect of losing their homes to foreclosure. Simply put, a loan modification is a negotiated transaction between a borrower and the current lender on that borrower's mortgage. The specific purpose of a loan modification is to bring the borrower's monthly mortgage payments back in line with his or her current financial situation. The primary requirement for a loan modification is a verifiable financial hardship for the borrower. The hardship must directly relate to the borrower's ability to make payments toward the mortgage on the home in which he or she lives. Hardships include adjustable rate increases, a loss of value in the property to a point of negative equity, and/or job loss to name a few examples. Once hardship is determined the work can begin to reduce the monthly payments required of the borrower.

Many borrowers will try initially to negotiate directly with their lender in a do-it-yourself manner. This is usually an extremely frustrating and unproductive endeavor due to the borrower's lack of knowledge of the loan modification process. At the same time, lenders are reluctant to provide the time, education, and advice in a situation where the lender would be negotiating against itself. Modification shops participate in the loan modification process using negotiation templates that may or may not have been reviewed by an attorney at one time. By running the process according to the template, end results for borrowers can typically be less than satisfactory due to the sense that money was left on the table in a negotiation didn't yield as much as it should have. Often forgotten is that a mortgage is, in itself, a legal document drawn by the lender with fine print, difficult language, and obligations the borrower might not even be aware of. While these first two options are always available to borrowers, an attorney's experience and knowledge of mortgage documents and the negotiation process can make a huge difference in the eventual outcome of a loan modification.

Loan modification is accomplished by adjusting one or more of the terms of the mortgage to allow for a reduction in the borrower's monthly mortgage payment. Most, if not all, loan modifications start with a reduction in the interest rate of the borrower's current mortgage. The interest rate reduction can be fixed or adjustable, usually with an initial term of three to five years. Another method is to extend the borrower's mortgage beyond its current maturity. A normal extension will take a mortgage from 30 years out to 40 years. The extra ten years on the mortgage typically reduces the borrowers' total monthly payment by 6.5%. The combination of an extension with a reduction in interest can result in much lower monthly payments for borrowers. In cases where property values have decreased substantially, homeowners may see a reduction in the principle amount of their mortgage as well. This type of reduction is seen in only about 5 % of executed loan modifications.

Should I incorporate my business? If so, what type of entity should I form?

I would recommend to most anyone that owns his/her own business or even anyone that receives a 1099 at the end of the year should consider operating as an entity. There are many different reasons why someone may want to do so, but the main reason is to shield yourself from personal liability.

People usually ask a very general question, "What is the best form of business?" Typically, once people worry about limited liability issues or take a look at insurance costs and worry about uninsured risks and those types of things, that’s when they may think about forming an LLC, a limited liability company. When they want to raise capital, or find that they’re making a little too much money and getting taxed on everything, then they may think of forming a corporation to shelter some money in their corporation.

An LLC is generally the best choice for an owner of a start-up business who seeks to limit personal liability. Most people who haven’t heard the news about LLCs often think of S Corporations, but really the LLC has replaced the S Corporation. The LLC lets you form a legal entity that insulates you from liability for claims against your business and at the same time, it keeps your current tax status. So if you’re a sole proprietor and you form a one-person LLC, you’ll continue to be taxed as a sole proprietor. If you’re a partnership and you convert to an LLC, you’ll continue to have your business taxed as a partnership, so you don’t change your tax status.

And another important part of it is if you’re ever thinking of having your business own real estate, it can be a very, very big mistake to form a corporation because you’ll get hit with double tax on the appreciation of any real estate owned by the business. That’s not true of an LLC.

Having said all of this, if you feel comfortable with your current level of insurance coverage, given the type of business you’re in, then you don’t really need to worry too much about your business form, at least for legal liability reasons. You may want to form a particular type of business for tax purposes, but the main reason to form an LLC or corporation for legal purposes is to limit your liability.

If you do actually have adequate insurance -- by the way, you’re in the minority -- but if you do, then maybe you can just go about your life and your business without worrying about this. But, for most people, that’s not true.

If you’re dealing with the public, if you have people come on your premises, or if you’re doing any kind of contract type of business with others, it’s just true these days that disputes often end up in court or have the potential to. It helps business owners sleep better at night to have this type of automatic liability insurance, this kind of automatic insurance they obtain by incorporating or forming an LLC.

Should I have a will?

The short answer is YES! While there are many different opinions as to what form of estate planning you should implement, there is no debate that you should implement some form of estate planning. The simplest form is having a will or simple trust drafted by your local legal professional. While no one likes to think with the end in mind, it is inevitable, and, unfortuately, we don't know exactly when our time will come. This is why you should get your affairs in order today. Don't let the state determine where your assets will go. Give me a call today and let's discuss your options.