In foreclosure? Ask about a loan modification

Foreclosure can be overwhelming and scary, but if you take the right steps, you may be able to keep your home and save your assets. The following information is intended to help you better understand loan modifications.

Overview of Loan Modifications

A loan modification is one of the best options available to homeowners and lenders alike.

A loan modification is beneficial to the borrower as it allows the person or family to stay in their home and gives them loan terms that are more suitable 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 rating intact.

Loan modifications are also beneficial for banks and lenders, especially with foreclosure rates soaring in recent years. Banks lose a lot of money in a foreclosure. A foreclosure not only costs money but often results in an overall loss for the banks as the homes are often sold for less than their value or the outstanding loan amount itself.

In a March 6, 2008 CNN report, America Mortgage’s Bob Moulton said, “It’s cheaper for a bank to renegotiate payments than it is to pursue someone and miss monthly mortgage payments.” That’s absolutely true; Banks are losing over 50 cents on the dollar on homes being sold through foreclosures.

Loan modification is a long-term solution that helps the borrower make their loan payments and stay in their home. This can be achieved by:

Lowering the interest rate

Changing from a variable to a fixed-rate mortgage

Extension of the loan period (period in which the borrower has to repay the loan)

switch to a different type of credit

Some forms of loan modifications are more readily available than others. One of the easiest ways to modify your loan is to ask for an interest rate reduction. Most lenders are willing to aggressively lower interest rates for qualified applicants. A lower interest rate can save you anywhere from a few hundred to thousands of dollars each month; this depends on the amount of your loan.

Extending your loan is another modification option that is often not too difficult for a lender to make. By increasing the number of years that you have to pay back a loan, a homeowner can shave a few hundred dollars off their monthly payment. However, it should be noted that this option increases the total amount of the repayment due to additional interest accruing over the extended term of the loan.

A reduction in the principal balance is the most difficult loan modification to achieve. The lender waives part of your debt. It is very difficult to get a lender to agree to this type of change as the lender has to report this money as a loss on their balance sheet and the purpose of credit modification is to minimize losses.

Background information on loan modifications

Subprime mortgage practices deserve much of the blame for the current crisis. Earlier this decade, mortgage lenders made huge profits by lending money to borrowers with questionable credit ratings. The booming housing market and the availability of cheap credit created a refinancing cycle where a borrower who could no longer afford their monthly mortgage payments could simply refinance into a new mortgage; often at a low teaser rate.

However, as the housing market faltered, subprime borrowers were unable to refinance. This resulted in a record number of foreclosures. As reported in a December 2006 New York Times article, “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 goes on to explain that “Foreclosure will cost these homeowners an estimated $74.6 billion, primarily in equity.”

Recently, a new wave of problems with so-called Alternative A loans has emerged. These Alt-A loans have been very popular among the self-employed or those with a reported income in recent years. Many people who received Alt-A loans have not been able to keep their mortgage payments on track, especially as these loans have been adjusted to accommodate higher interest rates. With housing prices falling, borrowers are reeling 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