When people speak of “loan modification” more often than not they are referring to mortgage loans, though in general the same principle can be applied to any sort of loan. In the most general sense, loan medication means any change to the previously agreed upon terms of a mortgage loan. However, realistically the most common meaning of the term relates to having the original terms of a mortgage modified in order to keep the borrower in their home and prevent foreclosure, which usually not in the best interests of either the lender or the borrower. Therefore, this article refers to mortgage modification in favor of the borrower in order to avoid foreclosure proceedings.
In the wake of the subprime mortgage crisis and the subsequent collapse of the American housing market, foreclosures on real estate skyrocketed across the country. Many people found themselves locked into mortgages that amounted to much more than the actual homes were worth while others found themselves stuck paying for property that they intended to resell. The number of foreclosures nationally has reached unprecedented levels in 2008 and 2009 and is expected to continue to increase throughout 2010. As a result, the market is saturated in surplus housing and general values have decreased in most major markets. Frequently, it is in the best interest of many lenders in today’s market to work with borrowers in order to avoid foreclosure proceedings, which is almost guaranteed to result in a loss for the lenders.
The present is the perfect time for borrowers to approach their lenders and request loan modifications in order to make their monthly payments more bearable. There are many different ways that a mortgage loan can be modified. In general, the lenders are more sympathetic to the idea of lengthening the term of the loan, thereby lowering monthly payments, or allowing forbearance options. However, savvy borrowers should seek more aggressive modification terms, such as reducing the interest rate, having the interest rate fixed, or reducing the principal of the loan. In general the lenders will never suggest these options, but if the borrower asks for them, the lender might be willing to accept these terms depending on the overall situation.
In general, the terms of loan modification have to be agreed to by both parties outside of the context of a bankruptcy filing (when loans are modified through court ordered loan reorganization). Therefore, borrowers approaching a lender usually ask for more than they really want and be willing to compromise in order to reach an agreement that both sides are willing to accept. It is, in general, a process of negotiation and people seeking loan modification should enter the process understanding this. The exception is if the borrower qualifies for, and decides to take advantage of, the federal government’s Home Affordable Modification Program (HAMP). HAMP is a government sponsored loan medication program that was designed specifically to curtail the number of foreclosures and operates on clearly defined, largely non-negotiable terms. To learn more about the HAMP option, borrowers can visit the Making Home Affordable website at http://makinghomeaffordable.gov/.
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There are many, many factors that go into deciding who is truly in need of a loan modification. Even then, unfortunately, some of the people who are in need will not qualify for a loan modification. While the process of obtaining a loan modification may seem simple at first, it is actually a very in depth procedure that requires a lot of planning and knowledge on the part of the borrower.
Before a borrower even attempts to approach his lender or a third party organization to obtain a loan modification, he or she should exhaust all other options. For many, budgeting money, cutting back on personal or unnecessary spending, and cutting out or delaying other bills may be the best answer. Many people try to get a loan modification while making expensive car payments or paying for small luxuries such as vacations, cable television, or wireless internet. These things can quickly add up and leave one more financially burdened than he or she may realize. If these individuals would simply opt for a less expensive car or go without a few luxury items, they might find they are able to make mortgage payments without the help of a loan modification. Talking to lenders and trying to work out unofficial payment schedules or some other type of agreement is another good option. If, however, one has stripped away all unnecessary expenses and finds that he or she is still unable to meet the demands of the mortgage, then he or she should consider a loan modification.
If one has come to the realization that loan modification is the best option, he or she should first speak with a financial professional or an attorney, if possible. After this has been done or after one has obtained all of his or her financial information, including valid proof of why the terms of the loan cannot be met, then he or she should speak with the mitigations department or home retention department at his or her lender’s institution. Often times, one will be able to work out the details or at least get the ball rolling on the process through a simple phone conversation, providing that he or she is adequately prepared and polite.
If this does not work, finding a qualified third-party company or a non-profit debt management organization may be the answer one is looking for. One should be careful to do proper background research on any organization or individual he or she employs to help with the process. Some of these companies exist only to exhort money from their clientele and can leave borrowers in even more of a predicament than they originally were.
Proper help and knowledge about one’s financial state and about the loan modification process are truly the best tools one can be armed with. There is always a way out of debt, whether it be loan modification or another option, but one must be persistent and use good discretion in the pursuit of it.
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When one is considering trying to get a loan modification to help with a mortgage or a past due bill, there are very important facts that he or she should keep in mind. Understanding the information provided in this article can mean the difference between getting the help one needs and wasting a great deal of time and money.
The first thing that one must consider is whether or not a loan modification really is the answer for his or her present situation. Many people use loan modification as a first choice, when in fact, it is more of a last resort. Individuals should try budgeting their money and getting financial advice from a professional if possible. If, after having done this, they still cannot seem to meet ends meet and pay off loans on time, then they may consider other options with the help of an advisor. Only after all other options and measures have been explored should a person think about going the route of a loan modification.
One of the reasons for this is the fact that in this tough economy, loan modifications are getting more and more difficult to qualify for and to obtain. This is due partially to how popular they have become, as banks and loan modification companies are overwhelmed with requests and applications. If, however, one does decide to apply for one, he or she should be very careful during the application process. Even a tiny, seemingly unimportant error on the application form can make the difference between qualifying and not qualifying. If at all possible, one should fill out these forms with the help of an attorney.
Individuals should also be sure that they have an acceptable debt ratio as compared to their income ratio. A ratio in the proper realm, usually around the forty-five percent debt mark, shows that the individual will be able to pay off his or her loan by making regular payments on time. Many people do not understand the numbers and figuring that are involved in calculating one’s debt ratio, so a lawyer or another trusted financial professional is often one’s best bet in comprehending this invaluable data. Borrowers should also be sure that they can prove an inability to pay off their mortgage or loan. Those individuals who can not prove the existence of real financial hardship rarely qualify. Loan modifications are not, as a general rule, given to those who are living beyond their means and have simply put bills or mortgage payments on the back burner.
A loan modification is not going to help one escape the responsibility of paying off his or her mortgage. It may afford one a greater time span in which to do so or the option of making smaller payments, but it will not completely clear up the financial burden. Loan modifications do work, but they only work if the individual who has applied for one is a good candidate and will be able to meet the terms of the ammended agreement.
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