Many Americans have heard of President Obama’s plan to rescue the housing market. One aspect of this plan is to urge banks to modify the mortgages of many distressed homeowners. With so much press and misinformation, it can be very difficult for the average consumer to understand what a loan modification is. This article will shed light on discussing the advantages and disadvantages of mortgage modification for the average American.
Loan modification is when a lender reviews your existing promissory note (balance, interest rate, and terms) and then makes changes based on your financial situation. Ultimately, for a bank to modify your loan on more favorable terms, it must be in a position where it is more profitable for them to lower your payment rather than foreclose.
Once the loan modification has been initially approved by the lender, the lender will do a “test” on the loan account to make sure that once the permanent modification of the terms of the promissory note is made, the client can actually perform the payments. Most banks will put borrowers on a ‘test payment plan’ that generally lasts 3-6 months. During this trial period, borrowers are required to make a reduced payment on time for a specified period. The unfortunate part is that while borrowers are making these test payments, there is still no final modification guarantee, and the bank still informs the owner late on their credit report. Also, during this trial payment period, collection activity still occurs.
Before applying for a mortgage modification from your lender, you need to understand how this will affect your situation. The good thing about having a modified mortgage is that, at least temporarily, it will lower your monthly payment. This can be done by lowering the interest rate or simply by extending the repayment term. Also, in exceptional cases, the principal may be reduced from the loan balance. Due to falling home prices in recent years, this is the only way that many homeowners can lower their monthly payments because they cannot refinance on their negative net worth. The unfortunate part of this loan modification system is that banks are extremely slow to process them. And not only that they are so inefficient that many people are denied assistance despite having a valid hardship.
It has been estimated that only about 6% of mortgage modifications have been approved. Because of this terrible statistic, the Obama administration has begun cracking down on the big banks, forcing them to process more modifications quickly to try to get this country out of the housing crisis it has been in. Although mortgage modification is not the “end of everything” for some homeowners, it can certainly help millions who are struggling with tight payments and negative equity.
If a borrower is looking for help, they need to know the pros and cons of mortgage modification to understand what they are dealing with.