Loan Modification Frustration
Loan modifications, although always an extreme mortgage workout option, has only recently become a mainstay of the consumer finance vocabulary. A mortgage modification is a legal process by which the original terms of your home loan contract or mortgage may be modified to new terms if agreed to mutually by the lender and the borrower.
Although this article will be focused on mortgage loan modifications any loan can be modified via a legal contract modification.
The Typical Mortgage Loan
In a standard home loan contract (mortgage) a borrower is expected to make regular monthly payments consisting of principle and interest until the mortgage is paid in full. During this repayment period the mortgage lender retains a lien on the property as collateral, in the even the borrower fails to repay the debt in accordance with the mortgage agreement–in which case a lender will often resort to foreclosure.
Why Modify Loans Instead of Foreclosing?
In recent years, due to economic crisis and the rapid deflation of the housing market the US government has encouraged the modification of mortgage in lieu of foreclosure actions. In many cases banks and lenders have endorsed this process since many of the properties held as collateral are worth less than the outstanding balance of the mortgage, and foreclosure are often a costly process for lenders.
Types of Loan Modifications
Ideally mortgages are modified to the benefit of a troubled homeowner in one of the following ways:
- Reduction in the mortgage rate
- Change from floating rate to fixed rate
- Change in the way a floating rate is calculated or indexed
- Lengthening the term of the loan
- Mortgage forbearance
- Reduction of late fees and other penalties
- Capping the monthly payment to a percentage of household income
- Reduction in principal
Most loan modification programs require or strongly prefer borrowers to be current on their mortgage payments. However, based on the discretion of the mortgage lender or servicer, a mortgage may be considered for modification even if the borrower is late, in default, in bankruptcy, or in foreclosure.
Factors Considered in Qualifying a Loan Modification
Generally loan modification programs are voluntary programs instituted by the mortgage lender or servicer of your mortgage. As a result the qualifying rules and standards may vary widely according to who holds your mortgage. However, these are some of the general guidelines lenders use to consider loan modifications:
- Financial hardship
- Employment status
- Household income
- Financial assets (reserves)
- Outstanding mortgage balance
- Equity in the home
- Future financial situation
- Lender’s cost benefit of loan modification versus foreclosure
Loan Modification Resources (Only Official US Government Websites):
- HUD: Loan Modification Frequently Asked Questions
- HUD: Approved Housing Counselors
- HUD: Avoiding Foreclosure
- MakingHomeAffordable.gov
- Making Home Affordable: Loan Modification Eligibility
- Making Home Affordable: Home Affordable Refinance
