Mortgage Loan Modification Primer
A result of the past few years’ financial crisis and dramatic increase in distressed mortgage loans and foreclosures is the advent of an upswing in property owners seeking loan modifications to help avoid these unfortunate things happening to them. Everywhere you turn these days someone is talking about loan modification, who needs them and how they can get relief from their personal crisis and improve their financial situation or avoid foreclosure?
Not everyone knows how to get a loan modification or if they are even eligible for one. In this article we will be discussing the basics of mortgage loan modification, who qualifies and how they can go about securing a new deal that will hopefully prevent them from losing their home and damaging their credit.
How Can Loan Modification Help Such a Bad Situation?
Borrowers who have found themselves in financial trouble since the bubble burst a few years back can achieve a lot by applying for modifications to their current mortgage. Owners who must now face the reality of a possible foreclosure because they are now suffering financial hardship due to a lack of employment, a cut in wages, or possibly a family emergency are all in the same boat and looking for ways to salvage their home and their credit. Many families across America have found relief in mortgage modifications that lengthen the term of their loan, lower or stabilize their interest rate, and for those who are able, lower the principal owed by making an extra payment in order to make it commensurate with the current assessed value of their property. Any of these modifications will help the distressed home owner by lowering their monthly loan commitment, stave off a pending foreclosure, eliminate or decrease late fees, and help to maintain their credit rating. Needless to say, it also allows them to remain in their home and keep their family safe, secure and comfortable.
Despite even having had a sale date set for a property these loan modification strategies can be applied for and should be. All of these changes translate into a lower monthly commitment for homeowners and can help them avoid foreclosure, late fees, and damage to their credit score.
It is never too late to try and save your home or your credit. Once a loan is modified much of the late fees and surcharges will no longer be an immediate liability, but the money that a borrower owes on principal and interest from before will most likely be added to the end of the modified mortgage. Distressed homeowners need to understand that help is available, but not absolution.
What Is Loan Modification?
In the past the term loan modification meant any changes at all that would be made to a loan once it is signed and enforced. However this term has come to mean any changes that may occur that are designed to help a distressed borrower avoid foreclosure status and/or forfeiting their property. Many times a homeowner will work closely with the original lender to resolve these serious matters because they are ostensibly in a partnership with them and their understanding of the situation, and their ability to resolve the issues, is to both parties benefit. The lenders are often able to alter the terms to insure timely payments even if this means they must lower the interest rates or accept smaller, but more frequent payments. Lenders often see this strategy as an alternative to having to foreclose on the owner and divest themselves of the property through a short-sale, auction or as a foreclosure and lose money.
In other situations, the lender will be inspired to work with borrowers to modify a home loan through state or federal government incentives. Furthermore, with the current state of the economy and the new laws that have been passed to assist American homeowners, some banks and mortgage companies are required to do modifications in situations that meet certain criteria.
Is It Unreasonable to Think a Lender Would Be Willing to Modify A Loan?
Despite the fact that lenders are often thought to be hard-hearted business people who are only out for themselves, some lenders are not. Some actually understand what is happening across the nation and want to help out. Other lenders simply know it is in their best interests to help those in distress and thus help themselves in the process. Self-serving, sure, but it can also be of great benefit to those looking to alter their mortgage and keep their heads above water.
It is costly for lenders to exercise a foreclosure on a property, and in so many instances they will never get back what is due, so loan modification is a way for them to also avoid financial problems. After all, most lenders have many borrowers in the same boat and so they need to help as many as they can to cut their losses as well. State and federal guidelines now also offer incentives that encourage lenders to work with homeowners rather than mercilessly evicting them.
Who Is Eligible for Loan Modification?
Most any home owner who is in distress and facing eventual foreclosure is more than likely eligible for loan modification. Individuals who are also faced with the prospect of bankruptcy are also within this category. Even if you loan is not currently in distress, but you are looking for some relief to help with your tight finances you can apply for loan modification to help reduce payments and ensure that you will not default in the future.
Unemployment, pay cuts and financial hardship due to family emergencies are all reasons that people seek and get loan modifications even if they are currently keeping up with their loan commitments. Many lenders, in an effort to not have a borrower reach the distressed level will allow a loan modification and prevent the worst from happening. If you feel you need relief then there is no harm in discussing this with your lender and presenting your set of circumstances for evaluation.
Remember, you will have to demonstrate that there is some kind of real hardship such as a loss of income, death in the family, personal illness or the illness of a family member who requires your care, or other circumstances which impacts your family’s finances. Once hardship is established the borrower must then prove that they can actually keep up with the adjusted payments and not go into arrears again and default.
What Different Loan Modification Options Available?
Changes to the interest rate are at the top of the list and offer very quick and substantial help by making monthly payments much easier for the borrower. If a borrower is currently saddled with a floating or adjustable rate mortgage (ARM) by stabilizing it they are often able to keep their head above water and continue making timely payments. The third interest rate modification alternative is that the formula used to calculate an ARM can be altered.
How much time is left on a mortgage can also be altered to help a bad situation. In some cases, if the lender is very understanding and willing to help, the total principal can be reduced because the lender has decided to declare that you owe a smaller amount than you initially did.
Some lenders have been known to allow payments to reflect a family’s income by cutting them down to a manageable percentage so that the owners can sustain a certain standard of living and keep up with all the other expenses a family can have in this day and age.
The only way for a borrower in distress to know what is available to them is to talk to their lender and try to reach an equitable agreement that both parties are happy with.