Loan modification is a hot topic these days. Millions of home owners are currently struggling to make their mortgage payments, and many owe more than their homes are worth.
If you find yourself in this situation, your options aren’t great. Essentially, you can:
- Put your home on the market as a short sale.
- Stop paying your mortgage and let the bank foreclose.
- Or, approach your lender about a loan modification.
Clearly, the first two options aren’t ideal—both ultimately mean you’ll lose your home and wreck your credit. So it’s no wonder most people are attracted to the idea of loan modifications. Although a loan modification may be an option to help you resolve the inability to make your mortgage payments, it’s critical to understand what you’re getting into before you file a loan modification application.
What is a Loan Modification?
A loan modification permanently alters the terms of your original home loan in order to make payments more affordable. Some loan modification programs offer a reduction in interest rate or of the principal amount due, although some modifications simply increase the term of the loan, resulting in a lower payment but more total interest paid.
Although loan modifications achieve similar results as refinancing, loan modifications may be available to borrowers even if they’ve defaulted on mortgage payments or are between jobs.
How Loan Modifications are Arranged
Some lenders will arrange loan modifications for distressed borrowers directly. Additionally, there is the government-created Home Affordable Modification Program (HAMP). Under HAMP, many lenders—including those which hold VA and FHA loans—agreed to offer similar loan modification standards. In order to be eligible for HAMP, borrowers must meet certain requirements. For example:
- The property must be owner-occupied.
- The borrower’s income must be verifiable.
The Reality of Loan Modifications
So far loan modifications sound like a great deal, right? You can get a more affordable mortgage payment on your existing loan even if you’ve lost your job or don’t have great credit. But consider the following unflattering realities of loan modifications:
1. Loan modifications do not address negative equity. Get a loan modification, and you get a lower monthly payment. In most cases, however, you’re still upside down on your house. That’s not good a long-term financial situation in which to be.
2. The odds a loan modification will succeed are not favorable. According to an October 2010 report by the U.S. Treasury Department, approximately 11% of loan modifications in the past nine months have failed. In other words, the borrower defaulted on the loan again. That may not sound that bad—after all, that means 89% of modifications succeeded, right? Maybe not. That statistic does not account for borrowers facing foreclosure during the trial loan modification period (because the foreclosure process can take months).
3. Many borrowers can’t access loan modifications in the first place. Either they may not meet eligibility requirements or their lender refuses to participate in modification altogether. For example, Bank of America will only modify a loan if the monthly payment amount is more than 31% of the borrower’s gross monthly income.
4. Some loan modification programs are simply scams. Unfortunately, whenever people are facing adversity, there are those that try to take advantage of their vulnerability. Any home owner consider modification should:
- NEVER give money up-front to individuals who claim that they will modify your loan.
- NEVER sign over a deed to your house to anyone that you don’t know.
- READ any paperwork you are asked to sign completely and carefully.
- NEVER sign any contracts with blank spaces where the person who claims to be able to modify your loan will “fill in the rest later”.
Despite the drawbacks, many Americans try loan modifications as a last effort to stay in their homes. For some, the programs work, for others they don’t. If you want to try to modify your home loan, visit the Department of Housing and Urban Development’s website at HUD.gov, to find a free HUD-approved housing counselor in your area. You can also call the government-sponsored Home for Homeowners program for free information over the phone, at (800) 225-5342.