Facing foreclosure can be overwhelming and scary, but if you take the right steps, you may be able to keep your home and save your credit. The following information is provided to help you better understand loan modifications.
Loan Modifications Overview
A loan modification is one of the best options available to both homeowners and struggling lenders.
A loan modification is beneficial to the borrower because it allows the individual or family to remain in their home and gives them loan terms that are better suited to their particular lifestyle or situation. A loan modification compared to foreclosure, bankruptcy, or some of the other options, allows the borrower to keep his credit rating intact.
Loan modifications are also beneficial to banks and lenders, especially with foreclosure rates that have skyrocketed in recent years. Banks lose a lot of money in foreclosure. Not only does it cost money to carry out a foreclosure, it often results in an overall loss for banks, as homes often sell for less than they are worth, or less than the outstanding loan amount.
In a CNN report on March 6, 2008, America Mortgage’s Bob Moulton said: “It is cheaper for a bank to renegotiate payments than to chase someone and lose monthly mortgage payments.” This is completely true; banks lose more than 50 cents on the dollar on homes sold through foreclosure auctions.
Loan modification is a long-term solution that will help the borrower make loan payments and stay in their home. This can be achieved by:
lowering the interest rate
switch from a variable rate mortgage to a fixed rate mortgage
extend the term of the loan (the period of time the borrower has to repay the loan)
switch to a completely different 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 decrease. Most lenders are willing to aggressively lower interest rates for qualified applicants. A reduced interest rate can save you from a few hundred to a thousand dollars each month; This 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 carry out. By increasing the number of years you have to pay off a loan, your homeowner can lower your monthly payment by a couple hundred dollars. However, it should be noted that this option increases the total repayment amount as additional interest accrues over the extended period of the loan.
A principal balance reduction is the most difficult loan modification to obtain. This implies that the lender forgives a portion of your debt. It is very difficult to get a lender to agree to this type of modification, because the lender has to report that money as a loss on your balance and the purpose of the loan modification is to minimize losses.
History of loan changes
Subprime mortgage practices deserve much of the blame for the current crisis. Throughout the early part of this decade, mortgage lenders made huge profits by lending money to borrowers with questionable credit histories. The roaring housing market and the availability of easy credit perpetuated a refinancing cycle whereby a borrower who could no longer afford his monthly mortgage payment could simply refinance into a new mortgage; often at a low advance rate.
However, once the housing market stalled, subprime borrowers were unable to refinance. This led to 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 past two years will lose their homes in the next few years.” The article further explains that, “foreclosure will cost those homeowners an estimated $ 74.6 billion, primarily in equity.”
Recently, a new wave of problems has emerged from so-called Alternative-A loans. These Alt-A loans were very popular in recent years with self-employed borrowers or those with declared income. Many people who got Alt-A loans have not been able to keep up with their mortgage payments, especially since those loans have adjusted for higher interest rates. With falling house prices, borrowers are turned upside down 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]