Loan Modification Tips

An increasingly popular alternative to foreclosure is the loan modification, an agreement where the bank and borrowers reduce the cost of the loan for a period of time to allow payments to be made on time. A loan modification is much like a mortgage refinance in that the objective is to find you a more affordable mortgage payment for your financial situation. Refinancing your existing mortgage to obtain a more affordable mortgage payment could still be an option, but modifying the existing loan is often the best solution for the homeowner that has incurred a financial hardship that prevents other mortgage financing or payment options. The purpose of this type of program is to help make the loan more affordable to the borrower.

A Loan Modification is a permanent change in one or more of the terms of a mortgagor's loan, allows the loan to be reinstated, and results in a payment the mortgagor can afford. Loan modification is a relatively new term for most people, but with the current market conditions and mortgage crisis, it is becoming increasingly popular. When possible, this approach is a preferable alternative to bankruptcy, and is a more fiscally attractive solution for any lender.

Programs that modify a loan are typically designed for homeowners who are having difficulty making their mortgage payment, but who can't qualify to refinance their mortgage. Programs may include reducing the interest rate, extending the term of the loan from 30 to 40 years, or adding missed payments to loan balance. Loan modifications are not the same as debt consolidations, refinancing loans, or even forbearance and can be used to stop foreclosure proceedings and instead reinstate the loans as they are being modified.

The lenders motivation in modifying a loan is that this is a better alternative to foreclosure. However, homeowners today are under the false impression that they cannot apply for this type of loan program if they are not in foreclosure. A loan modification allows the lender to transform a non-performing asset into a performing one and avoid the cost of foreclosure. The bottom line is that a loan modification is intended to reduce the payments for the borrower, make it more affordable, and reduce the risk that the homeowner will default on the loan.

So here again, loan modification is preferable, in that a renegotiated loan agreement allows you to keep paying down your monthly mortgage while maintaining your credit rating. Whether it's reducing the borrower's note rate or monthly payment, or extending the maturity date, a loan modification is a possible option for a borrower in default.

Understanding the plight facing homeowners today and the very real threat of foreclosure, assistance during the process of examining and pursuing solutions is essential. It is important to make the lender work with the homeowner to provide the best possible solution before it is too late. In the final analysis, loan modification is usually preferable to filing for bankruptcy and is a fundamentally sounder strategy than defaulting on the entire mortgage and creating costly foreclosure proceedings.