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In Foreclosure? Ask For a Loan Modification
Facing foreclosure can be overwhelming and scary, but by taking the right steps you may be able to keep your home and save your credit. The following information is provided to help you better understand loan modifications.
Overview of Loan Modifications
A loan modification is one of the best options available to struggling homeowners and lenders alike.
A loan modification is beneficial to the borrower because it allows the individual or family to remain in their home and gives them loan terms that work better for their particular lifestyle or situation. A loan modification compared to foreclosure, bankruptcy, or some of the other options, allows the borrower to keep his credit score intact.
Loan modifications are also beneficial for banks and lenders, especially with foreclosure rates increasing over the past few years. Banks lose a lot of money in a foreclosure. Not only does it cost money to go through foreclosure but it often results in an overall loss for the banks, as homes often sell for less than they are worth, or less than the outstanding loan amount itself.
In a CNN report on March 6, 2008, Bob Moulton of America’s Mortgage said, “It’s cheaper for a bank to renegotiate payments than to chase someone and lose the -monthly mortgage payments.” This is completely true; banks lose more than 50 cents to the dollar on homes that are sold through foreclosure auctions.
Loan modification is a long-term solution that helps the borrower make their loan payments and stay in their home. This can be accomplished by:
the interest rate is reduced
change from a variable to a fixed rate mortgage
the extension of the loan term (the period of time that the borrower must repay the loan)
switch to a different type of loan altogether
Some forms of loan modifications are more easily obtained than others. One of the easiest ways to modify your loan is to ask for a reduction in the interest rate. Many lenders are willing to aggressively reduce interest rates for qualified applicants. A reduced interest rate can save you anywhere from a few hundred to a thousand dollars per month; this depends on the amount of your loan.
Extending your loan is another way to modify, which is often not too difficult for a lender to accomplish. By increasing the number of years you have to pay off a loan, a homeowner can reduce their monthly payment by a few hundred dollars. However, it should be noted that this option increases the overall repayment amount as additional interest accrues over the extended loan period.
A principal balance reduction is the most difficult loan modification to obtain. This involves the lender forgiving part of your debt. It is very difficult to get the lender to agree to this type of modification, because the lender has to report that money as a loss on its balance sheet and the purpose of the loan method is which minimizes losses.
Background on Loan Modifications
Sub-prime mortgage practices deserve much of the blame for the current crisis. During the early part of this decade, mortgage lenders made huge profits by lending money to borrowers with questionable credit histories. The strong housing market and the availability of easy credit have perpetuated a refinancing cycle where borrowers who can no longer afford their monthly mortgage payments can simply refinance into a mortgage new; often at a low teaser rate.
Once the housing market stalled, however, sub-prime borrowers found themselves unable to refinance. This led to record numbers of foreclosures. As reported in a New York Times article in December 2006, “about 1.1 million homeowners who took out sub-prime loans in the past two years will lose their homes in the next few years.” The article further explains that, “foreclosure will cost those homeowners approximately $74.6 billion, primarily in equity.”
Recently, a new wave of problems has emerged from the so-called Alternative-A loan. These Alt-A loans have been very popular over the past few years among self-employed borrowers or those with declared income. Many individuals who obtained Alt-A loans could not stay current on their mortgage payments, especially since those loans adjusted to higher interest rates. With housing prices falling, borrowers are finding themselves upside down and actually owing more on their loan than their home is worth.
If you are facing a serious financial crisis, Contact Western Capital today at firstname.lastname@example.org
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