Loan Modification: How it works and can benefit homeowners. April 24
Loan modification is a term used to describe reworking the original terms of a mortgage loan to make it easier for the homeowner to make monthly payments. These days loan many Americans are turning to loan modification as last resort to help avoid foreclosure, and President Obama has asked lenders to do loan modifications for desperate homeowners whenever it is feasible.
Before loans can be modified – because a mortgage is a legal contract – the parties involved have to agree. This usually means that the lender must be willing to adjust the terms of the mortgage, and the homeowner must demonstrate great hardship in repaying the loan the way it is currently structured. By reworking the loan the lender hopes to continue getting monthly payments, which saves the lender money, and the homeowner hopes to get a more affordable mortgage that can be reasonably serviced without excessive debt and difficulty.
Ways that loans are modified include a variety of creative strategies or repayment plans. The lender may, for example, extend the length of the loan in order to make the average monthly payment smaller. Instead of a 30-year mortgage, for instance, the lender might make it a 40-year mortgage. Lenders will sometimes offer a lower interest rate, which can also lower payments. In extreme circumstances some banks and mortgage companies are even forgiving or wiping out a portion of the principal balance owed on the loan. By reducing what it is owed, the monthly payments go down to a level that can be more easily repaid by the homeowner. The lender sacrifices some profits but does not have to repossess the home, and home foreclosures often wipe out all of the potential profits that a lender had hoped to make.
When considering a loan modification, always seek professional mortgage counseling from a free, government-sponsored agency or a qualified attorney. Many scams involving promises of loan modification – and charging homeowners large amounts of money up-front for such services – are preying on homeowners. Before agreeing to any loan modification assistance always proceed with caution and use only reputable professionals with proven credentials.