If you are having trouble making your house payments and you are facing a long-term hardship, but you don’t quality for refinancing, a loan modification may be the answer. Losing your job or going through a divorce does not mean you have to lose your home. Modifying the existing loan can help pull your house out of default or foreclosure status. There are different structures of loan modifications that can make the payments more manageable and keep the property from reverting back to the bank.
Loan modifications exist to keep properties from going into foreclosure. They offer lower interest rates, extend the repayment terms an additional years or lower the principal balance to bring the loan current. An interest reduction plan makes payments more affordable. Generally, interest rates are dropped for a few years and gradually increase again over time, allowing the borrower to get caught up on the payments that are behind. It can help people get through financially difficult times.
A repayment plan may also be arranged to divide up the amount overdue and spread it out over upcoming payments to cure the default. This can be a little tougher for some borrowers to do if they don’t have the extra monthly income needed to keep up with the temporary higher payments.
Sometimes, however, the bank will even agree to a principal reduction plan. In these cases, the lender forgives the amount owed. The catch is that if equity in the home becomes available at a later date, the bank in entitled to a piece of it. The debt is not completely forgotten.
As the market continue to change, there are an equal number foreclosures and loan modifications. As foreclosures continue to drop, there is a continued need for modifications to get borrowers back on their feet and allow them to keep their homes. It is in everyone’s best interests to create a structured modified loan that works though, because both the lender and the borrower benefit from saving the loan and keeping it out of foreclosure.
The Future of Loan Modifications
In 2009, the Obama Administration initiated the Home Affordable Modification Program (HAMP). Though the program is set to expire in December 2016, it is unlikely that banks will stop approving the loan modifications. The program has already been set to expire several times since the first expected date that was set for December 2013. Though many people still qualified and could benefit from the program at that time, the process to apply proved to be too difficult. Many borrowers were denied, while others sought legal representation to get through the application process.
Since that time, the process has been made easier, but there are still many who could qualify for the program, but have not followed through on it. Furthermore, a white paper drafted by HUD, the Federal Housing Finance Agency and the Treasury Department stated that they will continue to oversee mortgage servicers as they expect to see loan modifications continue beyond the latest deadline.
One pitfall about loan modifications is that they still lack standardization, however. The structure of these modified loans are inconsistent across the board. The same terms are not offered to every borrower and each bank has their own standards to follow. This brings varied results as some borrowers go on to successfully get their mortgage loan back on track, while others end up back in default again.
While loan modifications continue to help struggling borrowers rescue their homes from foreclosure, there are several different structures available. The right structure will depend directly on your financial situation and what the best path is to keep it from going in to default in the future.