Many Americans have heard of President Obama’s plan to rescue the housing market. One aspect of this plan is for urgent banks to modify the mortgages of many distressed homeowners. With so much press and misinformation out there, it can be very difficult for the average consumer to understand what a loan modification is. This article will shed light by discussing the advantages and disadvantages of mortgage modification for the average American.
Loan modification is when a lender reviews your existing note (balance, interest rate, and terms) and then makes changes based on your financial situation. Ultimately, for a bank to modify your loan to more favorable terms, it must be in a position where it is more profitable for you to lower your payment rather than foreclosure.
Once a loan modification has been initially approved, the lender will perform a “test run” on the loan account to ensure that, once the permanent modification of the terms of the note is made, the customer will be able to make the payments. . Most banks will set borrowers up on a ‘trial payment plan’ which typically lasts 3-6 months. During this trial period, borrowers must make a reduced payment on time for a set period. The unfortunate part is that while borrowers are making these trial payments, there is still no guarantee of the final modification, and the bank still reports the homeowner late on their credit report. Also, during this test payment period, collection activity still occurs.
Before seeking a mortgage modification from your lender, you need to understand how this will affect your situation. The good thing about having a modified mortgage is that, at least temporarily, your monthly payment will be reduced. This can be done either by lowering the interest rate or simply by extending the repayment term. Also, in rare cases, the principal may be reduced from the loan balance. Due to falling home prices in recent years, this is the only way many homeowners can lower their monthly payments because they can’t refinance with their negative equity. The unfortunate part of this loan modification system is that the banks are extremely slow to process them. And not just that they are so inefficient that many people are denied assistance even though they have valid difficulties.
It has been estimated that only about 6% of mortgage modifications have been approved. Because of this dire statistic, the Obama Administration has begun to crack down on the big banks, forcing them to process more changes quickly to try to get this country out of the housing slump it’s been in. Although mortgage modification isn’t the ‘end of it all’ for some homeowners, it can certainly help millions of people struggling with tight payments and negative equity.
If a borrower is looking for help, they need to know the ins and outs of mortgage modification so they understand what they are up against.
