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Facing foreclosure can be overwhelming and scary, but if you take 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.

Loan Modifications Overview

A loan modification is one of the best options available to both homeowners and lenders.

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 best for their particular lifestyle or situation. A loan modification compared to foreclosure, bankruptcy, or some of the other options, allows the borrower to keep their credit score intact.
Loan modifications are also beneficial to banks and lenders, especially with foreclosure rates that have skyrocketed in recent years. Banks lose a lot of money in a foreclosure. Not only does it cost money to carry out a foreclosure, but it often results in an overall loss for banks, as homes often sell for less than they are worth, or less than the outstanding amount of the loan itself.

In a March 6, 2008 CNN report, Bob Moulton of America Mortgage said, “It’s cheaper for a bank to renegotiate payments than it is to go after someone and lose monthly mortgage payments.” This is completely true; banks lose more than 50 cents on the dollar on houses sold through foreclosure auctions.
Loan modification is a long-term solution that will help the borrower make the loan payments and remain in their home. This can be achieved by:

lowering the interest rate
Switch from an adjustable rate mortgage to a fixed rate
extend the term of the loan (the period of time the borrower has to 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 request an interest rate decrease. Most lenders are willing to aggressively reduce interest rates for qualified applicants. A reduced interest rate can save you anywhere from a few hundred to thousands of dollars each 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 do. By increasing the number of years you have to repay a loan, a homeowner can lower their monthly payment by a couple hundred dollars. However, it should be noted that this option increases the total repayment amount as additional interest accrued over the extended term of the loan.

A principal balance reduction is the most difficult loan modification to obtain. This involves the lender forgiving a portion of your debt. It is very difficult to get a 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 a loan modification is to minimize losses.

Background on Loan Modifications

Subprime mortgage practices deserve much of the blame for the current crisis. Throughout the first part of this decade, mortgage lenders made huge profits lending money to borrowers with questionable credit histories. The roaring housing market and the availability of easy credit perpetuated a refinancing cycle whereby a borrower who could no longer afford their monthly mortgage payment could simply refinance into a new mortgage; often at a low teaser rate.

However, once the housing market stagnated, subprime borrowers found themselves unable to refinance. This led to a record number of foreclosures. As reported in a December 2006 New York Times article, “about 1.1 million homeowners who took out subprime loans in the last two years will lose their homes in the next few years.” The article further explains that “the foreclosure will cost those homeowners an estimated $74.6 billion, mostly in capital.”

Recently, a new wave of problems has arisen from the so-called Alternative-A loans. These Alt-A loans have been very popular over the past few years with borrowers who are self-employed or those with a reported income. Many people who took out Alt-A loans have not been able to keep up with their mortgage payments, especially since those loans have been adjusted to higher interest rates. With falling home prices, borrowers find themselves upside down and actually owe more on their loan than their home is worth.

If you are facing a serious financial crisis, contact Western Capital today at [email protected]

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