Top Signs you May Need a Loan Modification

by tammy on May 7, 2010

Mortgage loan modification is an agreement between the borrower and the lender in which the original terms of the mortgage are changed in order to allow the borrower to maintain their payments as opposed to foreclosing on the property. Prior to the collapse of the real estate market in 2008, loan modifications were generally rare since most property could quickly be resold, meaning that lenders had little incentive to deal with borrowers in difficulty. Since 2008 that has all changed and today many lenders have a vest interest in maintaining old mortgages – which were made when the real estate was overvalued – than foreclosing and trying to resell the property at a lower value in a much tighter market.

As a general rule the lenders will virtually never allow a loan modification unless the borrower can show a very real financial hardship and that failure to modify the loan stands a good chance of resulting in a default. The primary reasons allowed are: (a) the mortgage was adjustable and the monthly payments have significantly increased well above the original level; (b) the borrower has faced a dramatic decline in income, frequently related to one or more of the people in the borrower’s household losing a job; or (c) the borrower has faced a recent financial hardship such as a major medical emergency. People facing any of these conditions have a better chance of getting their lender to agree to a loan modification than otherwise.

Another fairly firm indicator that a borrower may need a loan modification is simply based on the percentage of the borrower’s monthly gross income paid to servicing the loan. The general standard accepted by the federal government for approval to the government loan modification program (the Making Home Affordable program) is thirty-three percent. That is, if someone is spending more than thirty-three percent of their monthly gross (not net) income on servicing their mortgage loan, then they qualify for assistance under the federal program and are considered good candidates for loan modification programs, through the government program or independently.

Many other people may consider themselves to be in need of loan modification, but generally speaking, if one (or more) of the conditions described above do not apply, then there is very little chance of receiving a loan modification in any form. Further, in many cases the lenders may offer forms of loan modification that do not result in the principal of the loan being reduced or the basic interest rate. The most popular method of doing this is to offer a loan forbearance scheme, where the borrower is allowed a temporary period of reduced monthly payments on the understanding that when the agreed period ends, the borrower will repay the difference owed in full, plus interest. Such measures do offer some temporary relief, but ultimately result in the lender squeezing even more money out of the borrower.

In the final analysis, regardless of what the borrower thinks of their financial position, loan modification is only really an option if one of the conditions described above are applicable. Further, borrowers can expect to take a major hit on their credit scores and to have to fight for every concession from the lender. Loan modification is not an easy and painless process that is readily available to anyone that feels they could use some financial assistance. Instead, most lenders will not even consider the idea unless the borrower can show an extremely dire situation and represents a real threat of default.

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