What is a Loan Modification?

It is incredibly easy to become confused when it comes to the financial details of home loans and mortgages. Lately, many people are throwing around the term ‘loan modification.’ This article will explain the basics of modifying loans, when it may be a good idea to do so, and when you should use caution.

Simply, a loan modification is exactly what it sounds like: changes will be made to your loan terms. The question most people have is – how will these changes help me? Ideally, home loan terms are altered in order to make loan payments more affordable for borrowers. This is beneficial to lenders as well, because they want to keep borrowers paying on the loans instead of having them default.

If you are in danger of defaulting on your home mortgage and the word ‘foreclosure’ has been brought up more times than you’re comfortable with, moving forward with modifying your home loan may work for you and allow you to avoid foreclosing and losing your house.

The benefits of loan modifications for qualified borrowers are:

  • You may be able to get out of default and avoid foreclosure.
  • Any late fees you may have incurred may be waived.
  • Interest rates may decrease.
  • New monthly payments will be less than 31% of your gross monthly income.

In order to qualify for a governmentally approved loan modification programs such as HAMP, you must prove financial hardship that has severely affected your ability to stay current on your loan payments. Additionally, you must show that you will be able to pay the new, lower payments once they are modified. Lastly, your current monthly mortgage payment should be more than 31% of your gross monthly income.

It is extremely important that you are cautious as you move forward in the loan modification process. Because of the large number of distressed homeowners, many illegitimate “loan modification firms” have been caught running fake loan modification scams, after which, borrowers end up with no loan modification and they land in foreclosure anyway.

Your best bet when you find yourself in financial straits is to contact an experienced real estate or credit counseling attorney who can fight for the loan modification that you need to keep your home. Your attorney will be able to guide you even if you do not qualify for a modification, as there are other options that may help you get back on track financially, such as bankruptcy or a short sale. Be proactive and retain an attorney today before your home enters into foreclosure.

 

Photo credit: Marc Falardeau

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