Loan Modification

Loan Modification is great option to stay in (not sell) a property that you want to keep long term. This involves a lender modifying your payments so that you can afford to keep making them. The modification could include lowering the interest rate so that the payment is lower, or even adjusting the principle balance on the loan.

Note:  Loan modifications and Forbearance plans are both options provided by lenders to assist borrowers facing financial hardships. However, they differ in terms of their purpose and the specific changes they make to the original loan terms. Forbearance plans are temporary arrangements designed to provide short-term relief to borrowers experiencing financial difficulties. They allow borrowers to temporarily pause or reduce their mortgage payments for a specific period. Read more about Forbearance plans.

Loan Modifications:

  1. Purpose: Loan modifications are permanent changes made to the original loan terms to make it more manageable for borrowers in financial distress. They aim to provide long-term solutions to borrowers struggling to make their regular mortgage payments.
  2. Changes to Loan Terms: Loan modifications can involve various changes, such as reducing the interest rate, extending the loan term, or even forgiving a portion of the principal balance to make the monthly payments more affordable.
  3. Repayment: Loan modifications typically involve a permanent adjustment to the loan terms, including the repayment schedule. The missed payments or arrears may be capitalized by adding them to the outstanding loan balance, which can result in a higher overall loan amount.
  4. Credit Reporting: Loan modifications may be reported to the credit bureaus, and depending on how they are reported, they can have an impact on the borrower’s credit score. However, successfully completing a loan modification and making consistent payments can help rebuild credit over time.

Advantages and Disadvantages of Loan Modification

The advantage of a loan modification is that it can make an unaffordable loan affordable.

The disadvantage of a loan modification is that, based on our observations, most of the time the homeowner pursues these, they are ultimately not approved, or almost certainly not approved in a way in which it is helpful enough for the homeowner to stay in the home. In other words, most of the time it does not work and the result is foreclosure. We call this the “loan modification merry-go round”.

In a typical scenario, a homeowner will hire an expert to negotiate the modification. Please carefully research any company that offers this service for a fee. Usually the homeowner will be told to stop making payments  during the negotiation. At this point the lender will tell the homeowner that a modification is being considered. Unfortunately, based on our observations, most of the time the modification is ultimately denied (just before a foreclosure) and the homeowner is not able to make up all of the late payments and significant interest, penalties, and legal fees, and thus the result is a foreclosure.

The types of modifications that have a higher success rate involve converting an adjustable rate loan to a fixed rate loan or pushing out the interest rate adjustment for a couple of years. The types of modifications that have a lower success rate involve reducing the principal balance on the loan. Because many homes are so far underwater that a workable loan modification are usually not achieved.

Loan Modifications rarely work if you are already behind on payments. Before exploring this option, make sure you talk to a real estate professional at Real Property Hero and you Lender about all of your options! Regardless of your situation, income, or equity, if you would like to discuss all of your options for selling your home quickly or evening keeping your home and avoiding foreclosure, please call Mike.