Top Three Reasons to Consider a Loan Modification

by tammy on June 15, 2010

Loan modification, in the sense of having a mortgage loan modified in order to make the borrower’s monthly mortgage payments more manageable, has become a major trend in the United States since 2008. The fact that many people got themselves into mortgages that they are unable to service comfortably back during the housing boom and the “free credit” period has meant that many people are simply unable to stick to their original agreements since the housing bubble has collapsed and the subsequent credit crunch and recession. In fact, loan modification has become such a popular option that the federal government now operates its own loan modification programs for distressed homeowners, the Housing Affordable Modification Program (HAMP).

Obviously the first primary reason to consider loan modification is to reduce your monthly is to reduce you monthly mortgage payment. This can be accomplished through a myriad of different options, the most common of which are those that do not result in actually changing the amount owed. Most lenders that are willing to consider loan modification begin by looking to extend the amortization period of the original mortgage loan, or reduce the amount paid in each month by adding many more months to the life of the loan. Typically this can run up to ten years more added to the loan, so as the same loan is extended, the monthly payments decrease. In other instances the strategy involves recalculating the interest without actually reducing it or waiving additional penalties and fees. Much less common are loan modifications that actually reduce the amount owed by lowering the interest rate or reducing the principal of the loan.

The second reason to consider loan modification is that it may serve – at least in part – as an alternative to bankruptcy. Generally speaking the lender will not even consider loan modification unless the borrower is already in serious financial trouble and loan modification, usually in conjunction with other measures, may be seen as a better alternative to the lender. Nevertheless, this is certainly not true in all cases; sometimes a bankruptcy would be the better option, especially a Chapter 13 bankruptcy that results in a comprehensive debt restructuring agreement and can help debtors hold on to secured property like homes.

Finally, loan modification is basically unregulated; any sort of agreement can be reached assuming both parties agree to it. This means that if you are a shrewd negotiator, loan modification may provide financial relief in unique ways. The fact is that loan modification can be quite open to many different conditions and interesting alternatives, depending on the willingness of the lender. Needless to say, all loan modification depends on the willing acquiescence of the lender, so it has to be in their interest, but assuming you can come up with some creative agreement it is at least possible using loan modification.

Loan modification is widely touted as a cure all option for distressed borrowers, but this is not really the case. In general loan modification will not even be considered until the borrower is already in grave financial shape and other options are available. Nevertheless, loan modification can and should at least be considered as part of a general financial relief strategy.

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