How to Avoid Foreclosure: Loan Modification

There's no doubt about it: the economic outlook of our country seems quite grim. Corporations that generations have grown up with are struggling to make ends meet, and it sometimes seems like there is no way that we can stay ahead of the curve. Worse, many people are struggling to make ends meet themselves and worry that foreclosure looms in their future.

The good news is that there is plenty of good news! Because of the unique financial climate, a few powerful strategies have cropped up and can help people avoid foreclosure.

Of course, the best way to steer clear of foreclosure will be to create a spending plan that helps you and your family cut costs and expenses, thus freeing up enough money to pay your mortgage. However, sometimes a more advanced strategy is needed to avoid foreclosure. One of the most popular and powerful strategies that is available today is loan modification.

A loan modification is exactly what it sounds like: a change to your loan agreement. When you get a loan modification, you nearly always stay in the same loan you already have, but some of the terms of the agreement change. Remember: A loan modification is not a refinance. It is not a home equity line of credit. It is not an unsecured loan.

The point of a loan modification is to have a lower, more affordable payment on the loan that you already have with a lender. If you have a lower monthly payment, you have a better chance of actually making it; thus, foreclosure is avoided.

Some might wonder why a lender would agree to modify terms of an existing loan. To understand this, imagine you are a lender and that you let someone borrow money from you so they could buy a house. You and the borrower agreed to some terms for payback of the borrowed money, with one of those terms being that interest would be charged and paid with every payment made.

This is a great way for you, as a lender, to make money without working. However, let's say the borrower stops making payments and the housing market crashes, so they can’t sell the house to get out of the loan.

Do you want the house for yourself so that you can struggle to sell it at a very discounted price, or do you want to make at least some, or most, of your money back? Clearly you would rather make your money back.

This is why banks are interested in loan modifications. They make much better money off a mortgage that is being paid than they do off a home they have to repossess.

Before you apply, it is helpful to know some of the terms that might change in a loan modification:

  • Interest rate (lenders might lower this)
  • Loan payback period (extending it)
  • Skipping some payments (usually these are appended to the back end of the loan, so the skipped payments become the last payments you make)
  • Forgiving some principle (this is more common in homes which have depreciated, resulting in the borrower owing more than the home’s fair market value)

Next, you need to know how to get the loan modification process going. You have two options: 1) negotiating the loan modification yourself, or 2) hiring an agency to do this for you. If you do it yourself, simply contact your lender and ask about modifying the existing loan. If you go with an agency or company, you need to do your homework and find a reputable agency.

In either case, there are some issues you need to know before you get started. Before a lender will consider modifying your loan, you will need to meet some requirements. Lenders will look for:

  • A backlog of payments.
  • Income insufficient to cover your mortgage payment and your other monthly expenses.
  • Adjustable rate mortgages that are about to adjust, or have recently adjusted, in a way that will make your payment go up.
  • Negative amortization (Neg-Am) loans. (Amortization is the word used to describe the death or pay-off period of the loan. A loan amortizes over the length of time you are paying it off. So a Neg-Am is actually an interest-only loan, which means your monthly payments don't go toward the principal of the loan. They only pay the interest that the loan is accruing.)

If you fall into one or more of these categories, your chances of getting a loan modification are pretty good. Once you know if you might qualify for a loan modification, you can then help the process along by gathering several documents:

  • Income proof from the last three months (all income, including spouse's)
  • Detailed accounting of expenses, including all debt payments
  • Bank statements
  • All loan documents

The next step in the loan modification process is to formulate an idea for how much you want to reduce your monthly payment. You should do this based on your income. For example, if your income tells you that you will be about $400 short for the month, you need to be able to show your lender that this is the case.

When you are in the negotiation process, you want to remember that it is a negotiation and you will almost never get your first offer. So don't aim for the sky, but do aim high. If you need a $400/month reduction, ask for $600, and so on.

There are a few things to keep in mind as you ponder the idea of loan modifications. First, watch out for the predators. There are always companies looking to make a fast buck off the unwary, so take your time and make sure you hire a reputable company. Here are some ways to gauge whether a company is any good:

  • The company should have been in business well before the financial crisis began.
  • The company should have an established, substantial client list. The company should be able to provide references: real human beings you can talk to about their experience.
  • Established companies should be members of their local Chamber of Commerce.
  • If the company has a flashy website filled with banner ads, avoid them.
  • The company should have a substantial enough office staff so that lines of communication are always open.

Second, make absolutely sure you understand exactly what is happening each step of the way; even reputable companies want to make a good profit.

Finally, remember that while a loan modification is incredibly helpful, your efforts at protecting your assets shouldn't end there - the modification should only be one part of a robust, holistic approach to improving the overall health of your finances.

Jared Garret is a professional writer, business marketer, and consultant. To contact him, e-mail jared.n.garrett@gmail.com.

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