Loan Modification- Pros & Cons

Mortgage Modification Prevents Mortgage Foreclosure or a Short Sale

Jun 23, 2009 Asa Ghaffar

Loan modification was introduced to help struggling homeowners. This could help prevent mortgage foreclosure or render a short sale unnecessary.

President Obama's $75 billion Making Home Affordable (MHA) plan was introduced on the 4th March 2009. Loan modification involves adjusting the terms of a mortgage agreement to make house payments more affordable. A mortgage modification may consist of extending the term of a loan, a reduction in the rate of interest, changing the loan type or even reducing the outstanding balance. Qualifying homeowners will receive assistance until January 31, 2012.

Advantages of a Loan Modification

Avoid mortgage foreclosure. A loan modification helps to reduce house payments. Lower repayments could help prevent a short sale or mortgage foreclosure.
Less interest. Interest payments could be reduced to as low as 2.5%. Homeowners will also be able to switch from a repayment to an interest-only mortgage to help with affordability.
Clear some of the balance. A lender may be prepared to write-off a small percentage of the outstanding mortgage should negative equity be an issue.
Lower house payments. Extending the term, reducing interest rates, switching loan type or reducing the outstanding mortgage balance will help reduce house payments.
Anonymity. Unlike mortgage foreclosure, a loan modification won't result in a board appearing outside of the home. It is a private arrangement between a homeowner and the lender.
Peace-of-mind. Discussing financial difficulties with the lender's loss mitigation department and reaching an amicable solution helps to alleviate much of the strain a homeowner is under.

Disadvantages of a Loan Modification

Proof that money problems exist. To receive assistance under the Making Home Affordable (MHA) plan, it is necessary to prove that financial difficulties mean that house payments are no longer affordable to the homeowner.
Negative equity. Negative equity occurs when the loan secured on the property are worth more than the home itself. Only those with mortgages of 105% or less of their homes value will be assisted.
Insufficient coverage. The introduction of this plan does not assist all homeowners. Frustration exists amongst those who have struggled to keep-up with house payments, yet receive no assistance what-so-ever. Other commentators are claiming that some homeowners are deliberately missing repayments in order to qualify for government assistance.
Credit score. A mortgage modification reduces house payments, but reduces a FICO score. However, the majority of homeowners will have already missed repayments and the effect on a credit score is better than the majority of short sales and is always better than mortgage foreclosure.
Scams. A number of companies have emerged that are prepared to arrange a mortgage modification with the lender for a fee. Whilst some are legitimate, many are little more than scams. Government-funded help is available through organisations, such asnfcc.org.

A loan modification provides a welcome alternative to a short sale or mortgage foreclosure. Restructuring a mortgage helps to make house payments more affordable. However, those underwater with negative equity will only receive limited assistance.

Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.

The copyright of the article Loan Modification- Pros & Cons in Mortgages/Loans is owned by Asa Ghaffar. Permission to republish Loan Modification- Pros & Cons in print or online must be granted by the author in writing.

Does Loan Modification Help?	Avoid Mortgage Foreclosure	Arrange a Short Sale with the Bank
Mortgage Modification Helps with Negative Equity	Reduce House Payments