4 Benefits of Loan Modification

Loan modification is a publicly-funded program that pays lenders to help borrowers get through documented personal financial hardship by restructuring a home loan. Loan modification helps homeowners avoid default or foreclosure. While you typically end up paying more over the life of the mortgage, there are key benefits that make loan modification a good alternative.

You Keep Your Home

In a declining housing market, unemployment rises as does the national foreclosure rate. As borrowers find themselves unable to make loan payments, loans go into default, short sales are difficult because there are fewer buyers and lenders are forced to foreclose. The borrower loses his home and can lose home equity if the foreclosure sale is less than the loan balance. Additionally, in a foreclosure, if the sale of the home is less than the loan amount, and that amount is greater than the equity in your home, you still owe the difference between the sales price, equity and fees and the loan balance.

A loan modification restructures the existing loan with either lower interest rates or longer payout terms or both and lets you stay in your home. The loan modification program pays the lender to take these steps and you must prove the personal financial hardship that makes loan modification necessary.

You Keep Your Credit Standing

In a foreclosure, your credit score is affected three ways, late payments, loan default and foreclosure. However, a loan modification is not even reported to the credit bureaus. Your financial hardship might already have affected your credit score, but a loan modification is a way to keep it from getting worse.

If you see trouble looming for yourself financially, you can increase the benefit of loan modification by applying for it before you become late on your loan payments.

You Help Area Home Values

A foreclosure is public record and affects the values of all homes in your neighborhood. Not only are home prices falling in a declining sales market, foreclosures make values fall further faster because buyers are aware that there may be homes sold at auction in a particular area.

This is really a double benefit. You get to keep your home and your home’s value is not affected and your community values are maintained. You still face the market risk that all homeowners face, but at least the problem is not compounded by foreclosures.

Your Payments Go Down

The purpose of loan modification is a restructuring of your loan so that you can afford to keep up with payments. Typically, interest rates fall in a declining housing market, so your interest rate can be adjusted, or the lender can extended the life of the loan so you are paying the same balance over a longer period of time, which also would reduce your payment.

Be aware, with a longer payout term, the cost of interest means you will be paying a larger total amount over time. But that must be weighed against the expense of losing your home and your credit standing.