If you opted for an adjustable rate mortgage when you purchased your home, the interest rate can adjust upward over time--leaving you with a mortgage payment you can no longer afford. The possibility also exists that changes in your financial circumstances, such as a divorce or job loss, could leave you without sufficient income to make your mortgage payments. Should this happen to you, a loan modification can help you keep your home.
Facts
When a mortgage lender agrees to a loan modification, it restructures the borrower's original mortgage loan to make the monthly payments more affordable. According to the U.S. Department of Housing and Urban Development, altering a consumer's interest rate, waiving late fees and rolling previously missed mortgage payments into the new loan balance are all possible features of a home loan modification.
Considerations
If your home loan is serviced through Fannie Mae or Freddie Mac, you may be eligible for a loan modification through the U.S. government's Making Home Affordable program. In order to qualify for government loan modification, you must occupy the property, your loan must have originated before January 1, 2009, and you can owe no more than $729,750 on your mortgage loan. Exceptions apply, however, for consumers who own multi-family properties. If you receive one mortgage loan modification under the program, you cannot apply for another.
Features
Before you contact your loan servicer and request information about a loan modification, make sure you can afford to make the payments. The purpose of loan modification is to help you avoid foreclosure and keep your home. A loan servicer is unlikely to agree to modify your mortgage unless you meet basic income requirements. Some lenders may also require you to adhere to a three-month "trial" modification to ensure that you can afford the modified mortgage payments before finalizing the new home loan.
Misconceptions
One misconception about loan modification is that it offers benefits only for the homeowner and not the lender. Although loan modification does present some up-front costs for the servicing institution, it is far preferable to lenders than foreclosure. According to Dr. Joseph R. Mason of Drexel University, a 2007 study by Bank of America demonstrates just how expensive foreclosed properties are for banks. A bank must not only pay the legal fees and other various costs during the foreclosure process, but it also holds the responsibility of paying a broker or real estate agent to market the home along with paying taxes on the foreclosed home until it sells. Thus, a loan modification can save a lender just as much money--if not more--than it saves the borrower.
Warning
When considering whether or not to negotiate a loan modification, a loan servicer compares the cost of modification to the cost of foreclosure to determine which solution costs the lender less. In an interview with Warren Brasch, a Michigan attorney specializing in loan modifications, the Washington Post reports that if a homeowner has sufficient equity in his home to cover the cost of foreclosure, foreclosure may be a smarter financial option for a lender than restructuring a home loan. Thus, you may qualify for a loan modification but lose your home to foreclosure due to the amount of equity in your property.
References
- U.S. Department of Housing and Urban Development: Loan Modification Option
- U.S. Department of the Treasury: Making Home Affordable - Summary of Guidelines
- Wells Fargo: Wells Fargo Surpasses Half Million Modification Mark
- Drexel University: Mortgage Loan Modification - Promises and Pitfalls
- The Washington Post: Persistence Pays Off When Loan Modification Saves House and Credit
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