Loan Modifications Explained

A loan modification is a process whereby a homeowner's mortgage is modified and both lender and homeowner are bound by the new terms. The most common modifications are lowering the interest rate, reducing the principal balance, 'fixing' adjustable interest rates, increasing the loan term, forgiveness of payment defaults & Fees, or any combination of these.

Let's clear up any misconceptions about loan modifications:

1. The lender wants the homeowner out of their house
This is far from the truth! Lenders don't want a home to go into foreclosure because they will ultimately lose money. The lenders make money when the homeowners continue to make payments on the loan. In addition, if the homeowner is forced out, the lender will incur additional costs, such as maintenance to get the home ready to sell and then pay a commission to an agent for selling it. Not to mention the drop in home values are causing homes to sell for less than what is owed.
2. Credit scores affect the approval of loan modifications
Modifications are not dependent on credit scores. It is not a refinance or a new loan. In fact, Roberts says, a loan modification could actually improve credit scores over time, especially if it prevents a foreclosure or bankruptcy.
3. The homeowner must already be late on a mortgage payment to qualify
Not true, with changing requirements and lenders more eager to avoid foreclosures, that has changed. Some lenders are now willing to work with those borrowers who make their payments on time.
4. The Homeowner is better off walking away from the home or claiming bankruptcy
Lenders can pursue a deficiency judgment to recoup losses (not in all areas) and the borrower's credit is ruined.
5. It's too late to do anything after receiving a foreclosure notice. If the homeowner is still living in the home and it hasn’t yet been sold at an auction, they might still have time to work out a loan modification.

Some tips if you are considering a loan modification
One great tip: a forensic loan audit can put the borrower in the driver’s seat of that loan modification should one or more lender violations be found.
For the most beneficial loan modification, a homeowner should plan on hiring legal counsel and having a forensic loan audit performed. This could provide the leverage that would result in the homeowner in receiving not only a viable loan modification, but also more, including refund of interest paid and other compensation.