What are the Advantages of a Loan Modification?

by tammy on March 5, 2010

When people speak of “loan modification” more often than not they are referring to mortgage loans, though in general the same principle can be applied to any sort of loan. In the most general sense, loan medication means any change to the previously agreed upon terms of a mortgage loan. However, realistically the most common meaning of the term relates to having the original terms of a mortgage modified in order to keep the borrower in their home and prevent foreclosure, which usually not in the best interests of either the lender or the borrower. Therefore, this article refers to mortgage modification in favor of the borrower in order to avoid foreclosure proceedings.

In the wake of the subprime mortgage crisis and the subsequent collapse of the American housing market, foreclosures on real estate skyrocketed across the country. Many people found themselves locked into mortgages that amounted to much more than the actual homes were worth while others found themselves stuck paying for property that they intended to resell. The number of foreclosures nationally has reached unprecedented levels in 2008 and 2009 and is expected to continue to increase throughout 2010. As a result, the market is saturated in surplus housing and general values have decreased in most major markets. Frequently, it is in the best interest of many lenders in today’s market to work with borrowers in order to avoid foreclosure proceedings, which is almost guaranteed to result in a loss for the lenders.

The present is the perfect time for borrowers to approach their lenders and request loan modifications in order to make their monthly payments more bearable. There are many different ways that a mortgage loan can be modified. In general, the lenders are more sympathetic to the idea of lengthening the term of the loan, thereby lowering monthly payments, or allowing forbearance options. However, savvy borrowers should seek more aggressive modification terms, such as reducing the interest rate, having the interest rate fixed, or reducing the principal of the loan. In general the lenders will never suggest these options, but if the borrower asks for them, the lender might be willing to accept these terms depending on the overall situation.

In general, the terms of loan modification have to be agreed to by both parties outside of the context of a bankruptcy filing (when loans are modified through court ordered loan reorganization). Therefore, borrowers approaching a lender usually ask for more than they really want and be willing to compromise in order to reach an agreement that both sides are willing to accept. It is, in general, a process of negotiation and people seeking loan modification should enter the process understanding this. The exception is if the borrower qualifies for, and decides to take advantage of, the federal government’s Home Affordable Modification Program (HAMP). HAMP is a government sponsored loan medication program that was designed specifically to curtail the number of foreclosures and operates on clearly defined, largely non-negotiable terms. To learn more about the HAMP option, borrowers can visit the Making Home Affordable website at http://makinghomeaffordable.gov/.

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