United Finance Group

What is Loan Modification ?

According to the HUD website, a Loan Modification is a permanent change in one or more of the terms of a mortgage loan allowing the loan to be reinstated which in turn results in a payment the homeowner can afford. It is interesting to note that in most cases a homeowner in need of help will indeed qualify for a loan modification. To ensure that you understand what a loan modification will actually do for you, consider the following facts:

• A loan modification is indicated when the original loan that is secured by a residence has terms that make it impossible for the homeowner to continue making the payments, thus risking the loss of the residence.
  
  
• Loan modifications are not the same as debt consolidations, refinancing loans, or even forbearances. Instead, they are long term solutions for rising interest rates or other hardships that are threatening to overwhelm the budget of a homeowner.
  
  
• Loan modifications stop foreclosure proceedings and instead reinstate the loans as they are modified to fit the financial position of the homeowner.

There are some other facts that explain why lenders are actually in favor of working with borrowers and their legal specialists in order to negotiate equitable loan modifications.

• All or portion of the outstanding principal and interest, past due payments, escrow and late fees and even costs may be rolled into the loan modification and thus will not be lost revenue to the lender. Since they are spread over a long period of time, they do not pose a problem to the borrower.
  
  
• Modified mortgages may use a step rate approach or an extended term methodology to provide for the repayment of the due and past due funds. The lower payments ensure the repayment by the borrower while to the lender the added time is actually money in the bank in terms of yet to be earned interest due.
  
  
• Foreclosure is avoided and even though banks routinely foreclose on properties and sell the homes to other buyers, the slowing housing market has made it difficult for banks to dispose of such properties and recover additional funds from the previous homeowners. Loan modification is a fiscally more attractive solution for lenders.
  
  
• A modified loan protects the credit rating of a borrower and it also helps lenders by showing less defaulting loans in their portfolio. This of course makes a better impression when the financial institution is attracting potential investors.