How Will Loan Modification Help Me?

You’ve probably seen the ads in your email inbox or while surfing the Web. “Loan modification” is the latest and greatest fad with promises to save homeowners in crisis. If you’re one of the thousands stuck in a distressed mortgage, struggling just to make it to the next month, then you’ve probably wondered if this “loan mod” fad can help you.

Actually, loan modification is no fad. It’s been around since the 1980’s and came about as a method to help homeowners with troubled mortgages. It was also meant to prevent losses to lenders by, as the FDIC put it, “turning non-performing loans into performing loans.” In other words, get the borrower into a position where they can continue making payments.

With the recent housing and mortgage crisis, loan modification has taken center stage in the battle to reduce foreclosures. Since the 1980’s, the process has undergone the knife several times. But its original purpose remains the same.

If you’ve looked into having your mortgage modified, then you probably already know that the most common changes applied to a mortgage can include any combination of lowering the interest rate, extending the term, capitalizing of delinquencies (that is, rolling them up into the principal balance), moving from an ARM to a fixed rate, and forgiveness of fees.

However, which modifications you qualify for depend on several different factors — which may include your level of delinquency, your income to debt ratio, condition of the property, current property value, whether or not you are on your first mortgage, etc. — and can result in additional components to those just mentioned.

These may include any of the following:

Step-rate modification — A lowered interest rate that gradually increases back to the original rate.

Forbearing a portion of the loan — This is similar to reducing the principal balance, but the forborne portion must be paid off once the mortgage reaches maturity. In other words, you’ll have a lower payment throughout the term of the loan, but when it matures you’ll be required to make a balloon payment on the forborne portion.

Reducing the principal balance — By reducing the principal balance, you’ll owe less and, therefore, have a reduced payment. This may be done in situations where the value of the home has dropped significantly, to the point that its value is less than the remaining balance.

To find out which options you qualify for, it’s best to contact a loan modification company who understands the laws regulating the industry.