Top Three Disadvantages of a Loan Modification

by tammy on April 30, 2010

With the subprime mortgage crisis and the subsequent collapse of the residential real estate market, many people have been grasping at various means of staying in their homes, regadless of whether or not this makes good financial sense. One of the arguments made by the advocates of the Making Home Affordable program (MHA, the loan modification program subsidized by the federal government, http://makinghomeaffordable.gov/) was that the overwhelming majority of people no longer able to cope with their mortgages did not buy in hopes of “flipping” the property for a profit, but because they intended to stay in the home indefinately. The current rush for any means to stay in their homes seems to validate this argument.

One of the more popular options being discussed online relates to loan modification. Loan modification is, as the name implies, simply changing the terms of the mortgage in order to make it easier for the borrower to stay current on their debt despite the overall economic situation. Borrower prompted loan modification caneither be done indepedently (between the borrower and the lender), with the assistance of a third party specialist, or through the government-backed loan modification scheme alluded to above. Nevertheless, despite some of the promises made online, loan modification is not necessarily as wonderful as it might seem.

First, many people do not understand that any loan modification agreement – either voluntary or through the MHA program – will result in a major blow to their credit standing. The MHA loan modification in particular is rough on the borrower’s individual credit since it requires a three month trial period in which the borrower makes the new, adjusted payments as opposed to the old ones although the loan has not been officially modified at that point. This is reflected as three incomplete payments on the borrower’s credit spanning three months. Some of the financial press has taken issue with this reporting, but the credit bureaus and the lenders agree that it is valid, so this is unlikely to change.

Second, almost all loan modification agreements are considered final by the lender, so once an agreement is made, there will be no alternative offered at any point in the future, regardless of circumstances. For this reason it is essential that people that do petition for loan modification try to get the best deal possible, because chances are this will be the last change the lender will even consider afterwards. In many cases it would be better to turn down a loan modification agreement than to accept one that the borrow is not one hundred percent sure they can maintain.

Third, borrowers have to be careful about how the loan is actusally modified. As noted above, once a loan modification is accepted, usually that will be the last alteration ever allowed; therefore some unscrupulous lenders may sneak in new terms and conditions into the modified loan agreement.

Although this is not common and really cannot take place trhough MHA loan modification, it does happen on occassion and the results can sometimes be disasterous.  This is why it is usually a good idea to have legal counsel when negotiating a loan modification agreement.

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