What are the Advantages of a Loan Modification?

by tammy on March 7, 2010

 

The basic idea of loan modification is simply changing the terms originally agreed upon and this can apply to any kind of loan. However, in the current climate, when people are talking about loan modification they mean efforts to modify mortgage loans in order to avoid foreclosure. The basic idea is to make the borrower’s monthly mortgage payments more reasonable by lowering the amount. This can be accomplished in several different ways and in the present economic mess is frequently in the interests of both parties: the borrower and the lender. Therefore it can come as no surprise that loan modification has received a lot of attention over the last year or so.

For the borrower, the advantage is self evident: it lowers the amount due each month making it easier to maintain regular timely loan payments. Since the collapse of the real estate market, many people have found themselves locked into mortgages that are for far more than the actual property is worth. Further, the general economic slow down has resulted in many people losing their jobs, alternative streams of income, or facing other economic hardships, making their monthly mortgage payment all the more difficult. Nevertheless, most people that have purchased home recently tend to believe that the value of their property will rebound at some point and want to stay in their homes.

For the lender, the advantage of loan modification is that it can serve as a preferable alternative to foreclosure. Depending on the condition of the local real estate market, foreclosure can frequently lead to significantly larger losses than working with the borrower to ease the terms of the initial loan. In these cases, which are much more common since late 2008 and will remain common throughout 2010, the lender will often agree to some form of loan modification as long as the tangible benefit outweighs that of foreclosing on the property. With most real estate markets having bottomed out but not rising, an over abundance of houses available, and a steep decline in the number of people who qualify for new mortgages; keeping older mortgages alive – even if modified – is a good idea for many lenders.

The exact mechanics of available modification schemes differ based on the lender’s policies and practices as well as the general financial situation of both the borrower and the lender. Typically the lenders prefer loan modification programs that do not result in the overall amount owed decreasing, like extending the length of the loan or accepting a mortgage forbearance agreement. However, if the local real estate market is in bad shape and the lender is as well, a good negotiator may be able to convince the lender into actually reducing the amount owed, by reducing the interest rate or even the principal of the loan. There are other options as well, such as either waiving or stopping late fees and penalties or changing the interest calculations.

In general, loan modification is the product of negotiation between the lender and the borrower, usually initiated by the borrower. The exception to this is the federal government’s Home Affordable Modification Program (HAMP), which borrowers can learn about online at http://makinghomeaffordable.gov/.

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