Facing foreclosure can be overwhelming and scary, but if you take the right steps, you may be able to keep your home and save your credit. The following information is provided to help you better understand loan modifications.
Loan Modifications Overview
A loan modification is one of the best options available to both homeowners and lenders.
A loan modification is beneficial to the borrower because it allows the individual or family to remain in their home and gives them loan terms that work best for their particular lifestyle or situation. A loan modification versus foreclosure, bankruptcy, or some of the other options, allows the borrower to keep their credit score intact.
Loan modifications are also beneficial for banks and lenders, especially with foreclosure rates skyrocketing in recent years. Banks lose a lot of money in a foreclosure. Not only does it cost money to foreclose, it often results in an overall loss for banks, as homes often sell for less than they’re worth, or less than the outstanding amount of the loan itself.
In a CNN report on March 6, 2008, Bob Moulton of America Mortgage said, “It’s cheaper for a bank to renegotiate payments than it is to go after someone and miss monthly mortgage payments.” This is completely true; banks lose more than 50 cents on the dollar on homes sold through foreclosure auctions.
Loan modification is a long-term solution that will help the borrower make loan payments and stay in their home. This can be achieved by:
lowering the interest rate
change from a variable rate mortgage to a fixed rate
extend the term of the loan (the period of time the borrower has to repay the loan)
switch to a different type of loan altogether
Some forms of loan modifications are more easily obtained than others. One of the easiest ways to modify your loan is to request a lower interest rate. Most lenders are willing to aggressively lower interest rates for qualified applicants. A reduced interest rate can save you anywhere from a few hundred to thousands of dollars each month; This depends on the amount of your loan.
Lengthening your loan is another way to modify, which is often not too difficult for a lender to do. By increasing the number of years you have to pay off a loan, a homeowner can lower their monthly payment by a couple hundred dollars. However, it should be noted that this option increases the total repayment amount as additional interest accrues over the extended term of the loan.
A principal balance reduction is the most difficult loan modification to obtain. This implies that the lender forgives a part of your debt. It is very difficult to get a lender to agree to this type of modification, because the lender has to report that money as a loss on their balance sheet, and the purpose of the loan modification is to minimize losses.
Loan Modification Background
Subprime mortgage practices deserve much of the blame for the current crisis. Throughout the early part of this decade, mortgage lenders made huge profits lending money to borrowers with questionable credit histories. The roaring housing market and the availability of easy credit perpetuated a refinancing cycle whereby a borrower who could no longer afford their monthly mortgage payment could simply refinance into a new mortgage; often at a low teaser rate.
However, once the housing market stalled, subprime borrowers found themselves unable to refinance. This led to a record number of foreclosures. As reported in a New York Times article in December 2006, “about 1.1 million homeowners who took out subprime loans in the last two years will lose their homes in the next few years.” The article further explains that “foreclosure will cost those homeowners an estimated $74.6 billion, mostly in principal.”
Recently, a new wave of problems has arisen from the so-called Alternative-A loans. These Alt-A loans have been very popular in recent years among borrowers who are self-employed or those with declared income. Many people who took out Alt-A loans have been unable to keep up with their mortgage payments, especially since those loans have been adjusted to higher interest rates. With home prices falling, borrowers find themselves upside down and actually owe more on their loan than the value of their home.
If you are facing a serious financial crisis, contact Western Capital today at [email protected]