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Facing foreclosure can be stressful and scary, but by taking the right steps, you may be able to keep your home and save your credit. The following information is provided to help give you a better understanding of loan modifications.
Loan modifications overview
Loan modification is one of the best options out there for distressed homeowners and lenders alike.
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 work best with their lifestyle or particular situation. A loan modification compared to foreclosure, bankruptcy, or some other option allows the borrower to keep his or her credit score intact.
Loan modifications are also beneficial to banks and lenders, especially with foreclosure rates skyrocketing in the past few years. Banks lose a lot of money in foreclosures. Not only does it cost money to move forward with foreclosures, but it often results in a total loss for the banks, as homes often sell for less than they are worth, or less than the same outstanding loan amount.
In a March 6, 2008 CNN report, Bob Moulton of Mortgage America said, “It’s cheaper for a bank to renegotiate payments than to chase someone down and miss a monthly mortgage payment.” This is absolutely true. Banks lose more than 50 cents on the dollar on homes sold through foreclosure auctions.
A loan modification is a long term solution that helps the borrower to make the loan payments and stay in their home. This can be achieved through:
Lower the interest rate
Changing from a variable to a fixed rate mortgage
Extension of the loan term (the period of time for which the borrower has to repay the loan)
Switch to a completely different type of loan
Some forms of loan modifications are more easily obtained than others. One of the easiest ways to modify your loan is to ask for a lower interest rate. Most lenders are willing to cut interest rates significantly for qualified applicants. A low interest rate can save you anywhere from a few hundred to thousands of dollars each month; This depends on your loan amount.
Extending your loan is another method of modification, which is often very difficult for a lender to implement. By increasing the number of years that you have to pay it off, a homeowner can reduce their monthly payments by a few hundred dollars. However, it should be noted that this option increases the total amount of repayment as additional interest accrues over the extended life of the loan.
Principal balance reduction is the hardest loan modification to get. This involves forgiving the lender of a portion of your debt. It is very difficult to convince the lender of this type of modification, because the lender has to report this money as a loss on its balance sheet and the purpose of the loan modification is to minimize losses.
Background on loan modifications
Subprime mortgage practices deserve much of the blame for the current crisis. During the early part of this decade, mortgage lenders made huge profits lending money to borrowers with questionable credit histories. A bustling housing market and availability of easy credit has perpetuated the refinancing cycle in which a borrower who can no longer afford the monthly mortgage payments can simply refinance into a new mortgage; Often with a low sense of humor.
But once the housing market stalled, sub-prime borrowers found themselves unable to refinance. This led to record numbers of foreclosures. As a December 2006 New York Times article stated, “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 states that “Foreclosure will cost homeowners an estimated $74.6 billion, primarily in equity.”
Recently, a new wave of problems has arisen from the so-called alternative loans – a. Alt-A loans have been very popular over the past several years among borrowers who are self-employed or with a declared income. Many individuals who took out first class loans could not keep up their mortgage payments, especially since those loans had been modified for higher rates of interest. As home prices fall, borrowers find themselves tipped and actually owe more on their loans than the value of their homes.
If you are facing a serious financial crisis, contact Western Capital today at foreclosure@mycollector.com
