What is Loan Modification

Anyone who has paying attention to the news has heard of the term loan modification. While the economy has been struggling over the last few years, the effect on homeowners has been very damaging. The number for foreclosures escalated to the point that the government stepped in to help develop a plan that would help homeowners better able to afford their mortgages. The result was loan modification.

When a homeowner is unable to afford the loan payments, the banks now have the option to modify the loan for them. They can change the interest rates originally placed on the loan or change other terms of the loan to get the payments reduced down to an amount the homeowner can afford. For banks, it is much easier to offer this option than to try to collect the money in another way, such as repossession of the property.

To apply for a loan modification, you first must prove the bank that you are no longer able to afford the payments. In other words, you can not just decide that you do not want to pay the full amount. Many of the most common reasons for needing a loan modification are a sudden change of income due to job loss or a cutback of hours, divorce, illness, or some other circumstance that drastically reduced your ability to make the payments.

As stated above, you will need to prove this. Copies of current bank statements, bills, and notarized statements will be required from anyone who wishes to receive a loan modification on the mortgage. Not everyone qualifies and one of the most important things you can do is to prove that you still want to make the payments on the loan by keeping them current. Anyone too far behind on their payments may be disqualified.

While there are many advantages to a loan modification, there are certainly disadvantages, as well. One of the main issues that many people have been unaware of is the fact that during the process of your loan modification, your credit score will be affected. Many people who have gone through the process have found missed payments were reported on their credit report, even though they had been making the adjusted payments. This can be a disadvantage, but you should also understand that once you have been approved and it has been finalized, your credit report will be cleared up.

Another disadvantage is that any of your debt that is forgiven can still be taxed. Generally, if the lender chooses the option of reducing the balance of your loan, they are going to be using this as a write-off on their own taxes. In turn, if this is an investment property, you will more than likely have to pay tax on this sum. Before you choose this type of loan modification, you should consult with your tax professional to see how this will affect your taxes.

While the disadvantages are there, you can not ignore the fact that loan modification is helping many people keep their homes. However, you must realize that loan modification is often temporary. Most banks will temporarily lower the payments of the loan by reducing the interest rate. Often, in the contract it will state that the interest rate has been reduced for a period of five years. During this five year period, your payments could be reduced by as much 31% of your total income. In other words, if your current monthly income is $2,000, the total cost of your mortgage, which will include taxes, insurance, and interest, could be as low as $620 a month.

If you are in a situation that you can no longer afford to make the payments on your mortgage, the worst thing you can do for your situation is to ignore the payments and the lender themselves. Contacting the lender to apprise them of your situation can get the ball rolling on how they can assist you during a difficult time. Those who do not want to run the risk of losing their home will contact the lender to find out if they will qualify for loan modification. While it can take some time to complete, the process itself is not difficult and may be the only option for you to not lose your home.