Home ownership is, and has been part of the American Dream - a source of emotional and financial security for millions of Americans. When changes occur though, such as the economic situation of which we are in the midst, borrowers might find themselves challenged to make their mortgage payments each month.
When this occurs, a borrower may be able to avoid foreclosure and keep their home by applying to their lender for a loan modification. This guide, contains information about that process, and will answer many questions that borrowers have.
Understanding Mortgage Loan Modifications
A loan modification is simply an adjustment to the terms of a mortgage loan, by the lender. This could involve any or all of the following: the interest rate, loan amount, or type of loan (as in changing from a variable rate loan to a fixed-rate loan).
Reasons to get a loan modification
Being able to keep their home with payments that they can afford is probably the main and most obvious reason that a borrower might want a mortgage loan modification.
Reasons that payments have become more than a borrower can afford may be related to a rate change, brought on by an adjusting adjustable rate mortgage, or perhaps a change in employment situation.
Another good reason is the impact that a foreclosure would have on their credit profile. With the volume of foreclosures that lenders are seeing, they are making it increasingly more challenging for borrowers with a foreclosure in their recent past to purchase a home, even with sizable down payments.
A mortgage modification is different from a mortgage refinance, which is another way of bringing down the cost of a mortgage. For an explanation of the differences, see Chapter 5 of this guide, "Loan Modification vs. Refinancing."
What's in it for the lender?
The benefits to lenders in a mortgage loan modification situation are many, and include:
Saving the cost of filing for foreclosure. Filing foreclosure and going through the foreclosure process is time-consuming and expensive for lenders. They may find it more cost-effective to modify the loan instead.
Once a borrower goes into foreclosure, they usually stop making mortgage payments. This increases the carrying costs of the property for the lenders, which include taxes.
If the borrower decides to move out of the property, the lender will be left with maintenance costs of that property, including upkeep, association fees if there are any, and perhaps utilities, especially for homes in more adverse climates.
A foreclosed property often declines in value, due to neglected maintenance or vandalism. Disgruntled homeowners may deliberately let a house slide before they are evicted, and even remove items of value such as major appliances that came with the original purchase.
Having to try to sell a house that is worth less than the borrower owes on it, especially in a market with declining values and longer market times could spell huge losses for the lender.