What is Loan Modification?

Loan modification is designed to lower monthly mortgage payments and help financially strapped families remain in their homes. In the grand scheme of things, loan modification programs hope to help increase property values nationwide by helping homeowners avoid foreclosure (home values drastically decrease in neighborhoods with multiple foreclosures).

Loan Modification versus Mortgage Refinancing
While mortgage refinancing and loan modification have the same ultimate goal (to reduce monthly mortgage payments for borrowers), there are a few notable differences. Unlike mortgage refinancing, which issues borrowers a brand new loan with a new rate and term, loan modification simply modifies the borrower’s existing loan. Since mortgage refinancing involves a new loan, there is more paperwork and required documentation during the application process. Loan modifications are generally easier and faster to receive than mortgage refinancing.

Unlike mortgage refinancing, which is considered a permanent fix to mortgage payment woes, loan modification is a temporary solution. The borrowers adjusted, lower monthly payment stays in effect for five years, and then it slowly rises to a set rate.

Loan Modification Reduces Monthly Payments
Through loan modification, lenders can reduce the borrower’s monthly mortgage payment by issuing a lowered interest rate, by extending the loan term, or by charging no interest on the principal balance.

Under the Obama administration, the government and lenders will work together to ensure that a borrower’s monthly payment is not more than 31% of their gross monthly income. For many Americans struggling to make monthly mortgage payments, this is a more achievable percentage to work towards. The administration also rewards punctual borrowers; homeowners who pay their monthly mortgage on time can receive up to $1,000 off of the principal balance each year for up to five years.

Am I Eligible for Loan Modification?
Loan modification can benefit both parties involved: the bank and the borrower. Through loan modification, the bank will avoid a defaulted loan and expensive foreclosure costs. Likewise, the borrower will receive a lower monthly mortgage payment and be able to increase their monthly cash flow.

To be eligible for a loan modification, borrowers must fully document their current financial difficulties, whether they result from a job loss, health issues, divorce, or other financially straining event. The home in question must be their primary residence, and homeowners cannot owe more than 125% of their home’s current market value. Eligible loans must have been initiated on or before January 1, 2009, and may not have a principal balance more than $730,000.

Incentives for Lenders to Complete Loan Modifications
The Obama administration hopes that the loan modification program will help over four million American homeowners avoid foreclosure. In order to quicken the application process, the government is awarding incentives to lenders who complete loan modifications. Lenders will receive $1,000 for every loan modification they complete and will continue to receive $1,000 for up to three years, if the borrower makes their monthly payments. Such an incentive will help make the loan modification process more simple, quick, and competitive.

Be Aware of Loan Modification Scams
With the number of loan modifications increasing each month, scammers have found a new way to get unearned money from homeowners wishing to improve their financial status. Before choosing which lender you’ll trust to handle your loan modification, be sure to check their reputation, customer service ratings, and references.

Many loan modification scams involve collecting up-front payments from homeowners. The scammers claim they need to the up-front cash to initiate the modification process. In reality, though, the scammers keep the up-front cash and the homeowner never hears from them again.

If you are in the market for a loan modification, be sure to keep your eyes open to possible fraudulent behavior, and be sure to select a lender that is trustworthy and respected in the industry.

Loan Modification
Loan Modification