Dealing with foreclosure can be overwhelming and scary, but by taking the right steps, you may be able to save your home and save your credit. The following information is provided to help you better understand loan modifications.
Overview of loan modifications
A loan modification is one of the best options available to struggling homeowners and lenders.
A loan modification is beneficial to the borrower because it allows the individual or family to stay in their home and grants them loan terms that better suit their lifestyle or particular 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 good for banks and lenders, especially with soaring foreclosure rates 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 are worth, or less than the loan amount itself.
In a March 6, 2008 CNN report, Bob Moulton of America Mortgage said, “It’s cheaper for a bank to renegotiate payments than to chase someone and miss monthly mortgage payments.” It is totally true; banks are losing more than 50 cents on the dollar on homes that are sold through foreclosure auctions.
Loan modification is a long-term solution that will help the borrower make their repayments and stay in their home. This can be accomplished by:
lower the interest rate
switch from a variable rate mortgage to a fixed rate mortgage
extend the term of the loan (the period during which the borrower must repay the loan)
completely change the type of loan
Some forms of loan modifications are easier to obtain than others. One of the easiest ways to modify your loan is to request an interest rate reduction. Most lenders are willing to aggressively reduce interest rates for qualified applicants. A reduced interest rate can save you from a few hundred to a thousand dollars per month; it depends on the amount of your loan.
Extending 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 must repay a loan, a homeowner can reduce their monthly payment by a few hundred dollars. However, it should be noted that this option increases the overall 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 involves the lender canceling part of your debt. It is very difficult to get a lender to agree to this type of modification because the lender must report this money as a loss on their balance sheet and the purpose of the loan mod is to minimize losses.
Context of Loan Modifications
Subprime mortgage practices are largely responsible for the current crisis. Throughout the first part of this decade, mortgage lenders made huge profits by lending money to borrowers with bad credit histories. The boom in the housing market and the availability of easy credit perpetuated a refinancing cycle in which a borrower who could no longer pay his monthly mortgage payment could simply refinance into a new mortgage; often at a low teasing rate.
However, once the housing market stalled, subprime borrowers found themselves unable to refinance. This led to a record number of foreclosures. As noted in a New York Times article in December 2006, “about 1.1 million homeowners who took out subprime loans in the past two years will lose their homes in the next few years.” The article further explains that “the foreclosure will cost these owners approximately $74.6 billion, primarily in equity.”
Recently, a new wave of problems has emerged with so-called Alternative-A loans. These Alt-A loans have been very popular in recent years among self-employed borrowers or those with declared income. Many people who got Alt-A loans were unable to meet their mortgage payments, especially as these loans adjusted to higher interest rates. With housing prices falling, borrowers find themselves distressed and actually owe more on their loan than their home is worth.
If you are facing a serious financial crisis, contact Western Capital today at [email protected]
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