Saturday, November 8, 2008

What is a Loan Modification?

What is a Loan Modification?

Loan Modification is arguably the best tool that can be used by homeowners in the midst of financial hardship to save their homes from entering foreclosure.

According to the HUD website, a Loan Modification is a permanent change in one or more of the terms of a mortgagor's loan allowing the loan to be reinstated which in turn results in a payment the mortgagor can afford.

Loan modification is a term very unfamiliar to homeowners but not for very long. What most people are coming to realize is that losing their home to foreclosure is becoming a real possibility. Home foreclosure in America today is at an all time high and is affecting many homeowners that never believed they could lose their home to foreclosure. Homeowners are feeling the crunch of higher interest rates, fuel costs, and a slowing economy. A loan modification may be the only way for a homeowner to save their home. Negotiating with the bank for a modification of your home loan can be an overwhelming process for many homeowners and Pinnacle Hill Consulting is here to take the guesswork out of the entire process and keep you in your home at a payment you can afford.

To ensure that you understand what a loan modification can actually do for you, consider the following facts:

* A loan modification is indicated when the original loan that is secured by a residence has terms that make it impossible for the homeowner to continue making the payments, thus risking the loss of the residence.
* Loan modifications are not the same as debt consolidations, refinancing loans, or even forbearances. Instead, they are long term solutions for rising interest rates or other hardships that are threatening to overwhelm the budget of a homeowner.
* Loan modifications typically involve a reduction in the interest rate, principle balance or an extension of the length of the term of the loan. In some cases the resolution involves a different type of loan or a combination of the three.
* Loan modifications stop foreclosure proceedings and instead reinstate the loans as they are being modified.

The following are some of the factors that explain why lenders are actually in favor of working with the borrowers and their negotiators in order to reach an equitable loan modification agreement:

* All or portion of the outstanding principal and interest, past due escrow, late fees, and even costs may be rolled into the loan modification and thus will not be lost revenue to the lender. Since they are spread over a long period of time, they do not pose a problem to the borrower.
* Modified mortgages may use a step rate approach or an extended term methodology to provide for the repayment of the due and past due funds. The lower payments ensure the repayment by the borrower while to the lender the added time is actually money in the bank in terms of yet to be earned interest due.
* Foreclosure is avoided and even though banks routinely foreclose on properties and sell the homes to other buyers for a fraction of a price, the slowing housing market has made it difficult for banks to unload such properties and then recover any additional funds from the previous homeowners. Loan modification is a fiscally much more attractive solution for any lender.
* A modified loan protects the credit rating of a borrower and it also helps lenders in showing less defaulting loans in their portfolio. This of course makes a good impression when the financial institution is wooing potential investors.

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