Ways to Make a Loan Modification Work for You

by tammy on June 22, 2010

Borrower initiated mortgage loan modification is almost always viewed as a negative proposition to the lenders since it means that either the lender will receive less money back than originally agreed or – more commonly – that the lender will still receive the same amount of money back, but over a longer period of time. As such, lenders generally do not encourage loan modification and tend to make it as troublesome as possible while still leaving the option available for people. This means that realistically speaking, loan modification really only presents one advantage to the borrower: a lower monthly payment. Beyond this, there are really no tangible benefits to the borrower at all and the lender will inevitably take punitive measures as well, such as reporting negatives on your credit report.

The general convention in the United States is that a household should be spending roughly thirty percent of its gross monthly income on monthly housing expenses, so this is the lowest limit that most lenders will even consider lowering the monthly mortgage payments to. Further, the lender has to see a very real and tangible benefit in accepting a loan medication agreement over foreclosure and reselling the property. This means that any loan modification proposal has to be generous enough to the lender to make it more desirable than foreclosure. Remember that no lender is under any obligation whatsoever to accept a loan modification proposal, so the entire effort has to keep the lender’s interest in mind.

All of this means that from the very outset, a borrower considering making a loan modification proposal should bear in mind what loan modification can and cannot do. Contrary to some of the claims made online, the lender cannot be forced into accepting any modification proposal so the borrower should approach the lender amicably. Even if a forensic audit of the mortgage agreement shows some problems and errors, you cannot act on these without an exhaustive court battle and if you can afford that then you probably do not qualify for a loan modification in the first place. Loan modification merely reduces your monthly mortgage payment to a more reasonable level and that is all it can do for you.

While there have been instances of the lenders lowering the base interest rate or even reducing the principal owed on a mortgage as part of loan modification agreements, this is extremely rare. Remember, if the mortgage becomes less desirable than simple foreclosure and forfeiture, then the lender has that option. Instead, most loan modification agreements are designed to maintain the basic amount owed while lowering the monthly payment by extending the life of the loan. If the same basic amount owed remains the same but the length of the loan is extended, the monthly payments are lower since there are more of them. This is how most loan modification agreements work, though sometimes the amount owed each month can be reduced by other means, like changing the way the interest is calculated and assessed.  

Loan modification arrangements can offer troubled borrowers relief, but they do not represent a cure all solution for all people having trouble making their monthly mortgage payments. Knowing what loan modification can and can not do for you is an important thing to keep in mind when considering your financial options.

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