What is a Mortgage Loan Modification?

Today's question is, what is a loan modification?

A loan modification is essentially a refinance for distressed homeowners. 

If you're upside down on your property, if you're behind on your mortgage, if you've defaulted...

Then a loan modification might be the appropriate course of action to help you save your home. In a loan modification, any past due amounts, mortgage default interest, late fees, penalties, etc., are tacked on to the principal balance.

And in many cases, they'll extend the maturity date of the loan. Okay, this is what we call a capitalized loan modification.

The bank will reduce the interest rate in an effort to make the monthly mortgage payment more affordable. 

Thus enabling the homeowner to keep their house. A loan modification may be a viable home retention option if you intend on keeping the house and staying there permanently. If the goal is to do a loan modification and then sell it down the road, well, you may be out of luck because you still may be underwater on the property. 

Oftentimes, within the context of a loan modification, homeowners don't realize equity. They don't hit their break-even point for years down the road. During that entire period, you are essentially a renter in your own home. You don't have any equity.

If you don't view the home as an investment. 

If you view the home as simply your home, well then, that's fine. You're okay with that. So you shouldn't have any problem doing a loan modification, but something to be mindful of. Within the context of a loan modification, if you're upside down, you may be upside down for quite some time.

Something else to keep in mind as it relates to loan modifications is that the bank is in the driver seat with respect to awarding a loan modification. 

The standard of review isn't what's in the best interest of the borrower. The standard of review is what's in the best interest of the bank, right, what makes sense, from a financial standpoint, from the bank's perspective. Now, if the bank awards you a loan modification and those terms happen to be mutually beneficial, well then, great. Everybody wins. Everybody walks away happy. However, keep in mind, the standard is, what benefits the bank? The bank in its sole discretion will make the determination as to whether or not a loan modification is appropriate given the borrower's financial circumstances.

As such, only a relatively small percentage of loan modifications successfully pan out over the long-term. So if your lender declines your loan modification or if they come back with some bogus terms that you simply can't afford, that don't provide you with the sort of meaningful relief you need to keep your house, then remember, a short sale is always a viable alternative to simply letting it go to foreclosure in the event that the bank denies your loan modification.

As a refresher... 

A short sale is a real estate transaction where the bank accepts less than what is owed on the loan, forgives any remaining balance, helps you avoid foreclosure, and ultimately helps you get a fresh start.

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