The Top Three Advantages to Filing for a Loan Modification

by tammy on April 20, 2010

During the real estate boom that dominated the American economy intil late 2007, the entire investment cycle for owners of residential real estate was premised on the idea that the value of the property would constantly and consistently increase in value. If this had been the case, then the buyer would constantly have increasing equity that he or she could borrow against to maintain their debt payments and every one would live happily ever after. As became obvious by the start of 2008, the underlying premise – that the property would always increase in value – was obviously not the case and the whole residential real estate bubble began to crash. The collapse of the bubble not only directly affected real estate, but also led to larger problems such as the credit crunch (which put an end to easy credit) and the basic recession (which saw the economy shrink and a sharp rise in unemployment).

The result of all of this for many homebuyers was a financial disaster. Either people found themselves paying far more for the property than it was actually worth, found their payments skyrocketing despite no increase in their income, or simply lost the means of making their payments at all. As more and more people found themselves in these types of situations, the government became involved offering several different programs, tax credits, and incentives designed to help mitigate the effects of the economic downturn. Among these measures was the loan modification options given in the Making Home Affordable (or Home Affordable Modification Program, HAMP, www.makinghomeaffordable.gov) program. There are three primary advantages to loan modification through HAMP: its helps people avoid losing their homes to foreclosure, it can help people adjust their payments to a more manageable level, and it has fixed terms unlike voluntary loan modification agreements.

Contrary to some of the contentions made by pundits, in general most people that bought homes during the boom did so with the intention of staying in that home for a long time, regardless of the actual value of the property and the like. So the decline in value did not automatically result in a lot of people defaulting on their mortgages simply because it was a bad investment; instead the foreclosures largely stemmed from an inability to make their payments and HAMP loan modification can help to mitigate this trend, helping to avoid foreclosure by giving homeowners a better payment schedule.

The overall goal of the HAMP program is to help qualified homeowners continue with their mortgages, while ensuring that the monthly payments do not exceed thirty-one to thirty-three percent of their monthly income. Generally this is seen as a reasonable level of income to devote to housing costs and most people can handle this. HAMP loan modification is specifically designed to reduce monthly payments to this level, so it is well worth considering if the borrower’s payments have sharply increased or their income has sharply decreased since the start of the economic downturn.

Finally, one of the best things about the HAMP is that it mandates a strict sequence of reductions meant to lower the monthly payments to the target thirty-one percent of monthly income. Voluntary loan modification has no such strict guidelines, meaning that the terms can differ widely and many people can find themselves accepting a worse deal than it appears at first glance when negotiating a loan modification. However, the HAMP process is very strict on how and where the reductions are made, offering the borrower a degree of protection against being taken advantage of by lenders.

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