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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.
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