(NewsNation) — Those struggling to make mortgage payments can avoid foreclosure through a loan modification.
If approved, the structure and interest rate are often changed to make the mortgage more manageable.
What is a loan modification?
It is the permanent alteration of an existing mortgage to ensure it is more easily payable. There are multiple options available to those exploring a rate modification.
Interest rate cute: Reduces the payment amount due each month and the total interest across the lifespan of the loan.
Repayment period extension: This can increase the interest paid across the entire loan, but decrease your monthly repayment. Also delays the date you will own the property.
Changing from a fixed rate to an adjustable rate: This can lead to financial instability if rates go up. If they go down, monthly payments are cheaper.
Decrease the principal: If the lender forgives a portion of the loan balance, it can lower monthly payments.
How do you get a rate modification?
In order to get a rate modification, you must qualify first. There are at least three measures that you must be able to meet:
- The home is your primary residence
- Proof of hardship; whether it be financial, physical, or emotional
- About to, or already, behind on your loan payments
If these requirements are met, you must collect documentation and contact the loss mitigation department of your mortgage servicer.
From there, it is common practice to fill out an application. If denied, there are alternatives to a standard mortgage modification:
Refinancing: The process of taking out a new loan to pay off the existing mortgage. It is most suited to those behind on mortgage payments and less suitable if not, or if interest rates are lower than at the time of the original loan.
Forbearance: A temporary hold or decrease in payments. It does not alter the original accord, but if the forbearance terms are broken, litigation is possible.
Short sale: The allowance to sell one’s home for less than the property is worth. In these cases, the house proceeds go toward the outstanding mortgage payments. In most cases, if there is remaining debt, that is forgiven.
Deed-in-lieu of foreclosure: Instead of foreclosure — where the lender seizes the property and sells it, in some cases involving eviction — the deed-in-lieu allows you to relinquish ownership to be let out of the mortgage.
Is a loan modification a good idea?
This is a personal decision based on one’s situation. A mortgage loan modification is usually reserved for people facing serious financial hardship.
According to Andrew Dehan of Bankrate, it is suited for those who have “experienced a permanent loss of income and are falling behind on your mortgage.”
A rate modification will affect your credit score. However, it is far easier to rebuild credit than endure foreclosure.
Loan modification allows you to find a lengthy solution to financial issues and ensure you can refinance in future situations.