The Pro’s and Cons of a Loan Modification
Homeowners who are having a hard time making their mortgage payments may decide to fight to hold on to their home. A loan modification may lower monthly payments and make them more affordable, but for many Long Island homeowners and residents of the five boroughs a loan modification is not a good solution. The bank may offer a bad deal where you wind up owing the lender far more than the house is really worth. If you are in this situation, it is a good idea to weigh the pro’s and cons of a loan modification to determine if it is really the best option in the long run. If not, there are other alternatives to help you avoid foreclosure, such as a short sale.
How a Loan Modification Works
In a loan modification the terms of your existing mortgage are altered in a new arrangement with the bank. In a loan modification, the bank may change an Adjustable Rate Mortgage (ARM) to a Fixed-Rate mortgage, or they may reduce the interest rate on the loan. Some loan modification agreements extend the term of the loan to 40 years to replace a 30-year mortgage. The loan modification may add your past due interest, escrow and fees to the total amount owed and amortize the new amount over the term of the loan. Rarely, the bank will agree to lower the principal amount of your mortgage.
Understand your mortgage debt when faced with foreclosure
Banks are sometimes reluctant to give loan modifications, but they may decide to work with you rather than foreclose and take possession of your house. Be aware that banks are notoriously difficult to work with in a loan modification. Some people report that in order to move their application to “under review” status they have to resubmit the same paperwork time and again and deal with changing contacts at the bank.
The Pro’s of a Loan Modification
There are several benefits to a loan modification. The Fannie Mae Flex Modification program that replaced HAMP (Home Affordable Modification Program) allows you to reach an agreement with your lender and change the terms of your original mortgage. To qualify you may have to be ineligible to refinance your existing mortgage, face long-term hardship and/or be behind or likely to fall behind on your mortgage payments in the near future.
These are some of the pro’s of a loan modification if you qualify:
You would avoid foreclosure and remain in your home
If you are behind on payments, you would resolve your delinquency status
You may be able to reduce your monthly payments so they are more affordable
You would suffer less damage to your credit than if the bank foreclosed on your house
If you have an ARM with an increasing interest rate and a balloon payment at the end, you may be able to change it to a Fixed-Rate mortgage
The Cons of a Loan Modification
People having a hard time making their mortgage payments often make emotional decisions in an effort to stay in their home. It is important to consider the disadvantages as well as the advantages before you apply for a loan modification. If you decide that the loan modification offered by the bank is a bad deal, you should be aware that there are other options to avoid foreclosure and walk away debt free such as a short sale.
These are some of the cons of a loan modification:
- You may be offered a lower monthly payment in exchange for a higher amount due overall if the payment term is extended, for example from 30 years to 40 years.
- The total amount you would owe in a loan modification agreement may be a lot more than the house is really worth. In other words, you would be repurchasing your home for more than market value.
- There are processing and legal fees associated with the loan modification. These charges may be added to the principal of the loan, but you would still be responsible to pay. If you have any late fees, back taxes or escrow due, those charges may be added to the principal as well.
- If the lender “writes off” a portion of the principal by reducing the debt you may still be liable for income tax on that portion, although this option does not generally apply to a primary residence.
- The loan modification agreement the bank offers may be reported as a debt settlement and show that you did not honor the original mortgage contract. If it reports the loan modification that way, your credit score would suffer.
- There are no guarantees that you will be able to stay in your home. The lender may decide to encourage you to sell the property if they feel you will not be able to make the payments in the future, or they may deny the loan modification and begin foreclosure immediately.
- If you miss a loan modification payment, the bank may put you right back into foreclosure and escalate the process, creating a very stressful situation
What to do if the bank offers a bad deal for a loan modification
The Short Sale Alternative
In many situations, homeowners who are struggling to meet mortgage payments and facing foreclosure would be better off selling the home in a short sale and making a fresh start. This is especially true if you owe more than your house is worth taking the market value, back payments, fees and interest into consideration. The bank may be offering you an opportunity to buy back your home for a lot more than the house is actually worth.
For example, if the market value of your home is $500,000 but you owe more than $700,000, the bank may offer a deal where you will be paying $700,000 over the term of the mortgage for a $500,000 house, even if the monthly payments are lower. A short sale, where you sell the house and the bank agrees to accept less than what you owe and forgive the difference, is often a much better alternative to avoid foreclosure. It allows you to walk away debt free and move onto a fresh start!
Ten frequently asked questions about short sales
How Realty Warehouse can Help
Realty Warehouse can help if you live on Long Island or in the five boroughs of New York City and you are facing foreclosure. We specialize in helping homeowners find alternatives to foreclosure and achieve the best outcome. Realty Warehouse enjoys an A+ accreditation rating from the respected Better Business Bureau. You can count on us to offer the advice you need and provide effective alternatives in this extremely stressful situation.
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This blog is for informational purposes only, subject to change.