Balloon Payments on Loan Mods?

fighton

LoanSafe Member
Dec 10, 2010
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Hi All,

I have been reading about the terms that the lucky people are getting approved loan mods and some have balloon payments at the end. Does all HAMP mods have balloon payments? What exact does balloon payments mean? Does this mean at the end of lets say a 30 year term you would owe the remaining ballon payment? Thank you.
 

Michael Naz

Michael Naz
Jan 9, 2011
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Southern California
The balloon payments are from a principal forbearance that is part of the waterfall that HAMP using to achieve a 31% of the gross income in the monthly mortgage obligation. Not all HAMP modifications have the balloon payment at the end. The current waterfall is a 4 step process that is used to bring your mortgage down to a low-risk of default.

1. Recapitalize the loan by placing all of the past due payments on to the backend and bringing the loan to current
2. Reduce the interest rate in increments of .125% to a floor of 2%
-if they have not yet achieved a 31% in the GMI then on to step 3
3. Extend the term of the loan to 30yrs or all the way up to 40yrs if need be
-if they have not yet achieved a 31% in the GMI through steps 1-3 then lastly on to step 4
4. Forbear the negative equity as a non-interest bearing balloon payment due at the maturity of the loan or whenever refi. or sell.


So yes, it is possible and it does help some because it will give you the lowest possible mortgage payment. However you do still owe the balloon amount. As it is the last step in the current waterfall it is not often that it will get all the way to step 4 to achieve a 31% in your payment. More likely it would be through interest rate and term.
 

facha

LoanSafe Member
Dec 1, 2010
411
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0
Florida
Hi All,

I have been reading about the terms that the lucky people are getting approved loan mods and some have balloon payments at the end. Does all HAMP mods have balloon payments? What exact does balloon payments mean? Does this mean at the end of lets say a 30 year term you would owe the remaining ballon payment? Thank you.
Not all HAMP mods have balloon payments, depending on the loan amount the value, etc.

A balloon payment is due when you refi the loan (not likely), the home is sold, or at mortgage maturity date. That is when the total amount is due. For instance, if a borrower has a HAMP balloon mod, they can do 2 things to avoid a large balloon, either, set up a savings account to save the balloon payment or, down the road, when the finacial situation has improved, make extra principal amount payments. This will, depending on how much extra is paid over the years and how big the balloon is, reduce or eliminate the balloon payment at the end.

Hope this makes sense.
 

Michael Naz

Michael Naz
Jan 9, 2011
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Southern California
A priciple forebearance with a baloon payment may apply if the target payment,( 31% gross income), can not be achieved with a rate reduction to a floor of 2% over 40yrs., if you have enough negative equity.
 

Moe Bedard

Call 1-800-779-4547
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Aug 10, 2007
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If the loan is paid off early, the balloon becomes due at payoff. Unless you are prepared to give up an interest free loan early, instead of paying extra, put the money into savings, or t-bills or something. Unless you are sure you can refi or payoff the balloon, I suggest not paying anything extra. Instead set it aside to help pay the balloon if you have to sell, or for when you make your final mtg payment. Extra payments will generally be applied to the interest bearing part of the loan, not the balloon part.


9.6 Principal Curtailments Following Modification​
If a principal curtailment is received from or on behalf of the borrower on a loan that has a
principal forbearance, servicers are instructed to apply the principal curtailment to the interest
bearing UPB. If, however, the principal curtailment amount is greater than or equal to the interest
bearing UPB, then the curtailment should be first be applied to the principal forbearance portion.
If the curtailment satisfies the principal forbearance portion, any remaining funds should then be
applied to the interest bearing UPB. This eliminates the possibility of a curtailment paying off (and
satisfying) the interest-bearing portion of the UPB, which would cause the entire loan to become
due and payable and force the borrower to pay off the principal forbearance portion of the loan​
balance as a balloon payment.
 

joeesantos

LoanSafe Member
Mar 31, 2011
1
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0
I have been given a loan modification and the balloon payment is substantial. They did not reduce the interest 7.6% or extend the terms. They did recapitalize the loan. What is the equation to reach the GMI ? The loan mod saves me $116.00 a month.
 

Michael Naz

Michael Naz
Jan 9, 2011
2,965
38
48
Southern California
I have been given a loan modification and the balloon payment is substantial. They did not reduce the interest 7.6% or extend the terms. They did recapitalize the loan. What is the equation to reach the GMI ? The loan mod saves me $116.00 a month.
Typically they will use the standard "waterfall method" to get you down to a position of a "low risk of default". That is usually defined as spending no more than 31% on the PI mortgage payment. This is synonymous with most programs.

The steps are:
-Recapitalize the loan (bringing the loan to current and putting any late payments on the backend of the loan)
-Reduce the rate (in increments of .125% to a floor of 2%)
-Extend the term (all the way up to a 40yr or 480mo. Some programs even go to 50yrs)
-Principal Forbearance Reduction (reducing the principal payment based on a percentage of the market value and forbearing the remainder in the form of a non-interest accruing balloon.)

Again, the waterfall method is widely used but not in every program. Some programs have completely other guides. An example would be CAP, which recapitalizes the loan and will only reduce the rate to as low as 4%. This in most cases is still a huge benefit.

I have never came across a mod. where they just did a principal forbearance and nothing else. That is most definitely something that the servicer brewed up in house. I’d imagine they used their bubbling cauldron for that one, because even though your payment may be lower, you are still getting gouged on your rate.
 

janetvald

LoanSafe Member
Sep 13, 2012
1
0
0
Hello,

I am a bit confused. Doesn't this mean "This eliminates the possibility of a curtailment paying off (and
satisfying) the interest-bearing portion of the UPB, which would cause the entire loan to become
due and payable and force the borrower to pay off the principal forbearance portion of the loanbalance as a balloon payment." that extra payments will be applied to the balloon payment to avoid the interest-bearing UPB being paid off first and forcint the borrower to pay off the balloon?


Thank you for any clarification you can provide.
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missims

LoanSafe Member
Nov 2, 2012
2
1
0
The balloon payments are from a principal forbearance that is part of the waterfall that HAMP using to achieve a 31% of the gross income in the monthly mortgage obligation. Not all HAMP modifications have the balloon payment at the end. The current waterfall is a 4 step process that is used to bring your mortgage down to a low-risk of default.

1. Recapitalize the loan by placing all of the past due payments on to the backend and bringing the loan to current
2. Reduce the interest rate in increments of .125% to a floor of 2%
-if they have not yet achieved a 31% in the GMI then on to step 3
3. Extend the term of the loan to 30yrs or all the way up to 40yrs if need be
-if they have not yet achieved a 31% in the GMI through steps 1-3 then lastly on to step 4
4. Forbear the negative equity as a non-interest bearing balloon payment due at the maturity of the loan or whenever refi. or sell.


So yes, it is possible and it does help some because it will give you the lowest possible mortgage payment. However you do still owe the balloon amount. As it is the last step in the current waterfall it is not often that it will get all the way to step 4 to achieve a 31% in your payment. More likely it would be through interest rate and term.
Hi there,

I just received my final mod paperwork and something seems REALLY off to me. They are 'deferring' principal in the amount of $86,600. I understand what this means...I have to pay it at the end of the note. However, on one little bitty line, they have stated that I will owe $361,000 as a balloon payment! HUH? How can I have $86,600 as a principal deferral, due at the end of the loan, AND a balloon payment of $361,000???

Any help would be greatly appreciated. Of course, I only have a few days to accept their offer. Ugh.
 

Cat Damiano

Mortgage Wars
Sep 10, 2007
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Colorado
www.loansafe.org
Hi there,

I just received my final mod paperwork and something seems REALLY off to me. They are 'deferring' principal in the amount of $86,600. I understand what this means...I have to pay it at the end of the note. However, on one little bitty line, they have stated that I will owe $361,000 as a balloon payment! HUH? How can I have $86,600 as a principal deferral, due at the end of the loan, AND a balloon payment of $361,000???

Any help would be greatly appreciated. Of course, I only have a few days to accept their offer. Ugh.
How many months in default were you?
If so, what was that total amount?
What was your original payment amount?
What was the original loan balance?
 

missims

LoanSafe Member
Nov 2, 2012
2
1
0
I actually just got clarification and it makes sense, if what they are saying is true. We were 11 months at the start of the trial. The principal balance is now $569k and the deferred is $86.6k, leaving the interest bearing amount at $482k. They re-amortized the loan to 40 years, but didn't increase the life of the loan, hence the hefty balance due at maturity. It isn't technically a traditional 'balloon' payment. Rather, it is what is left to pay after 23 years (the remaining life of our loan), on a 40-year loan. So, even at refinance, according to Chase, the balloon is not due...just what is left on that 40-year term.
 
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Cat Damiano

Mortgage Wars
Sep 10, 2007
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Colorado
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I actually just got clarification and it makes sense, if what they are saying is true. We were 11 months at the start of the trial. The principal balance is now $569k and the deferred is $86.6k, leaving the interest bearing amount at $482k. They re-amortized the loan to 40 years, but didn't increase the life of the loan, hence the hefty balance due at maturity. It isn't technically a traditional 'balloon' payment. Rather, it is what is left to pay after 23 years (the remaining life of our loan), on a 40-year loan. So, even at refinance, according to Chase, the balloon is not due...just what is left on that 40-year term.
Yes, given a 40 year amortization schedule due in 23 years, that would create that type of balloon.
 

Beach

LoanSafe Member
Nov 14, 2012
9
0
0
Cat,

Would you recommend to accept this type of ballon mod? Since it is not an interest free principle forberance, but a 4o year amortization schedule due to 23 years, it may not be a good mod.
 

Cat Damiano

Mortgage Wars
Sep 10, 2007
10,541
39
48
Colorado
www.loansafe.org
Cat,

Would you recommend to accept this type of ballon mod? Since it is not an interest free principle forberance, but a 4o year amortization schedule due to 23 years, it may not be a good mod.

I can not speak for you, but I can tell you that I have personally accepted a modification on my own home that has a non interest bearing balloon without payments due on it until 25 years from now. We each have our own threshold of tolerance and in my case I didn't care in the least. Alot can happen in 25 years and all I was looking for in a modification was exactly what it had been put in place to accomplish, and that was an affordable payment. My property is 150k underwater, and again I personally do not care about that. I applied for the modification to bring my payment to an affordable level when I lost a significant amount of income and that is what it is designed to do. My payment is now less expensive than rents in my area and I am still a homeowner.



this is a part of the unpaid principal that you owe.

Here is an example:

You currently owe $300,000 in unpaid principal total along with all past due interest capitalized.
In order to get you to an affordable payment, because they just are not able to do it on the $300,000 amount, the servicer has to split off $100,000 of that $300,000, and puts it as a non interest bearing, non amortizing balloon payment.

Then the remaining $200,000 is amortized at the interest rate given over the terms given to arrive at the payment you will be making.

So that $100,000 is still there, you just wouldn't be making the payments on it, however, if you sell, transfer, or refinance the property, it will of course be due as it is a part of the original unpaid principal balance that you still owe even without a mod. What you need to understand is that the lender isn't forgiving that amount, they are forbearing it.