Understanding Loan Modification Programs

Loan modifications are becoming more common place, but the process hasn't become any easier as homeowners become frustrated as they still have a maze to navigate through with their lender.

While the foreclosure rate is on the increase, there are an increasing number of homeowners that have been able to avoid foreclosure by working out a loan modification with their mortgage lender.

Many homeowners are being offered the Making Home Affordable loan modification program, as lenders are given financial incentives to offer them. These government loan modification programs require the lender to put the consumer on a three month trial period and if the consumer can make the trial payments on time, then in most cases the lenders will approve the loan modification with an affordable payment.

Majority of the loan modifications done in today's market is under the Making Home Affordable Modification Program, which was developed by the Obama administration. This program did not gain traction as quick as the government had expected. Currently there are over 400,000 home owners that are enrolled in the 3 month trial period of the government program. Typically, the homeowner would be offered reduced payments for 3 months, and then their lender will agree to a reduced interest rate and lower payments for a minimum of 5 years. Some homeowners are seeing interest rates as low as 2%.

This program has been assisting about 100,000 home owners nationwide since the month of June, which may seem like a lot but only accounts for about 15 percent of homeowners that are late on their mortgage payment. While we don't have the exact numbers for the each individual state, we can definitely see this program putting calm to the foreclosure storm.

The lenders that are participating in the Home Affordable Program, have on their books about 84 percent of homeowners that are late on their mortgage. But these lenders are still only helping less than 50 percent of their delinquent home owners, which is an issue that needs to be addressed sooner than later.

We have come a long way, since the problem that began around 2007, as most lenders weren't even offering loan modifications at that time, instead they were either just foreclosing or they would just defer the late payments by adding it into the loan amount. This turned out to be nothing but failure as it didn't reduce the consumer's monthly payment, which is what majority of home owners need.

Now, the loan modifications done currently involve interest rate reductions and reduced monthly payment, extension of the loan terms from a 30 to a 40 year loan and in very rare cases homeowners might see a principal reduction.

Even with government interventions, there are still a lot of struggling homeowners that won't qualify for a loan modification as the unemployment rate increases and the economy gets worst. The Making Home Affordable Program can reduce the homeowner's payment to 31 percent of their income, however with the home owners other debts such as car payments and credit cards, they are still having a hard time making their monthly obligations. And if the home owner is unemployed, they can forget getting a loan modification; however some lenders will approve a loan modification if the homeowner is receiving unemployment checks.