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Is Home Loan Modification for You?


As more and more people have been approaching foreclosure, falling on hard times, and struggling to make ends meet, lenders have become more flexible with the terms of their existing mortgages. This has given some home owners the opportunity to modify their loans in order to do things like achieve lower payments, secure a better interest rate, or extend the terms. While not everyone can take advantage of this newfound flexibility, it is certainly worth investigating.

Qualifying Factors

If you are already making late payments or failing to pay, you are a prime candidate for a loan modification.  By working with an experienced professional, your situation can be adequately explained to your lender and a determination will be made as to whether or not they can change the terms to make your payments more manageable.

If you are up-to-date but fear falling behind is inevitable, you should be prepared to explain why your fears are not unfounded.  Loan modifications are typically considered for people who have recently become unemployed, experienced a medical emergency, been faced with the loss of a spouse who was contributing to the household, or had a related hardship that has impacted your financial security.

What Happens Next

After your situation has been communicated to the bank, an agent will determine whether or not you are a candidate and if so, how you can best be helped to keep your home and avoid foreclosure.  The assistance you will be given depends on your situation but can sometimes include:

  • Reduced Interest Rates:  The first thing the lender will consider is dropping the interest rate to as little as 2% to help lower your payments.  Because many homes have ended up in foreclosure due to adjustable rate mortgages gone awry, helping home owners to secure a locked-in, low rate is an important step in making one's loan far more affordable and preventing future hardships.
  • Extended Terms:  In some cases, lowering the interest rate will not reduce the payments enough to significantly improve the borrower's position.  Subsequently, the lender will consider extending the term of the loan to 40 years, up from the traditional 30.  Giving borrowers a longer period of time to pay back the money they owe on their homes translates to lower monthly payments.  Most people would rather pay for a longer period of time than lose their property to foreclosure. 
  • Forbearance of the Principal: A final option to reduce monthly payments is for the banks to grant forbearance on the principal portion of the owner's monthly obligation.  This does not mean that the principal is dropped entirely.  However, it does mean that up to a year can go by before you will have to start paying on that portion of your loan again.  It can be an effective way to help someone get back on his or her feet. 

What are the Consequences?

In most situations, the main consequences of loan modification are affordable payments.  Usually, this means that a house that would have been lost to foreclosure has been saved – a benefit to both the mortgage agency and the resident.

Financially, the impact of a loan modification to your credit is far superior than that of constant late payments and ultimately, foreclosure.  Administrative fees like late payment charges and documentation costs are also required to be waved, so although you will still be responsible for any money you owed, you will not have to worry about the extra charges.  Depending on your situation, this may be the best thing that ever happened to your home.


Common Mortgage Mistakes:

  Neglecting to Get a GFE
    You should thoroughly examine a Good Faith Estimate of all your lender's fees before you agree to a loan. Hidden fees can be a huge burden.
  Failing to Shop for Home Owner's Insurance Up Front
    Do not wait until closing to shop around for the best prices on home owner's insurance. As with all financial matters, you should compare premiums to find the best policy.
  Refinancing Too Soon & Too Often
    You can save money by refinancing, but only if you are selective about when and how often you do it.
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