In 2008, finding myself caught in the (pick your title) Great Recession/Mortgage Meltdown/Credit Crisis of the Century, I felt a sense of dread. My negative-am loan, a condition of refinancing that seemed sunny two years previous, was about to balloon my monthly payment by $600. My house, appraised at $700,000 at that time, suddenly was worth half that. I couldn’t afford my house with this 30-year mortgage, but didn’t want to leave, and didn’t want to be foreclosed upon. What to do? I naively called the mortgage holder and inquired, “Is there any way we could, um, ‘refinance’ again at a lower rate that I could afford?” At that point I had never heard this phrase: Loan modification. I had a lot to learn. Namely, I wasn’t alone in this mortgage predicament, and the banks were flying nearly as blind as I was. I soon learned that my only salvation could be a loan modification – revised mortgage terms to be granted only IF the bank wanted to have mercy and play ball. And the direct route to a loan modification was via hardship letter (basically a resume of how and why my financial situation had belly-flopped). I would eventually learn that not everyone seeking a loan modification gets lucky … but chances for a happy ending in loan modifications are greatly increased with a proper declaration.

What Is A Loan Modification?

In light of the struggling economy these days many homeowners have quickly realized that while it may be difficult to get into their dream home it can be even more of a challenge to stay in it. With high unemployment rates and many unexpected challenges the fight to keep up with mortgage payments can seem like an endless battle. Many are considering getting a mortgage loan modification as a way to keep foreclosures at bay.

When a homeowner requests a loan modification he is actually asking the lender to reevaluate and change the original contracted agreement so that they can reduce the monthly payments to a more affordable level. While this could prove to be a major advantage to the homeowner there are several factors that you should consider before pursuing this option. Considering the fact that there are very specific guidelines that the homeowner must meet along with several different ways that the loans can be modified it is worth it for the homeowner to fully understand this process before they proceed.

The Federal Home Affordable Modification Program

This program was put in place by the federal government in an effort to assist many struggling homeowners to keep their homes and avoid foreclosures. While you may be very interested in this program the government has very specific guidelines that must be met for a homeowner to qualify for such assistance. The program allows for the home to be refinanced at a much lower interest rate in order to get a lower monthly mortgage.

Extending the Mortgage Term

Another type of loan modification involves extending the original mortgage term over additional years and thereby lowering the monthly payment. This type of loan modification can reduce the amount of the principle payment over the additional years allowing the monthly payment to be reduced.

Principle Forbearance

This type of loan modification means that the lender will defer a portion of the principle balance for a later date. It is very important that you understand fully the risks involved in this type of modification as many homeowners have mistakenly believed that a portion of the principle has been ‘forgiven.’ This is not the case however, instead the homeowner quite often will discover that he may be faced with a balloon payment or a lump sum payment at the end of the loan or may be expected to refinance before the final mortgage comes due. If you’re looking at a principle forbearance type of loan then make absolutely sure that you understand just what will be expected of you for the duration of the mortgage so that you are not hit with any surprises further at a future date.

Principle Forgiveness

Finally, you may be able to qualify for a principle forgiveness from your lender. This form of modification is often confused with the ‘principle forbearance’ but is much more favorable. In these cases the lender (at his own discretion) is willing to forgive a portion of the loan balance thereby reducing the amount of money you will owe on the remaining balance. While this is probably the most optimum opportunity for a homeowner it is important to realize that these decisions are extremely rare and are often offered only in the case of extreme hardship.

A Word of Caution

Homeowners that are facing imminent hardship should seriously consider getting a real home loan modification. There are many non-profit agencies with financial counselors that can fully detail the various options of loan modifications available to you. Still, it is your responsibility as the homeowner to do your own research and homework to make sure that the advice they’re giving you is accurate, legal, and up to date. This way you can be sure that the modification loan that you get will help you to fend off an impending foreclosure and not bring on any added stresses in process.

Beware of Scams

While it would be wonderful if we lived in a world where people did not take advantage of the vulnerability of others, we don’t. You need to be aware that everyone that offers you a great deal on a modification loan is not always above board. Be wary of anyone that expects you to pay a fee up front in exchange for counseling services or those who pressure you to sign anything without allowing you time to read it first. Never sign over your property to anyone unless you’ve discussed it with your mortgage lender first and never make a payment to anyone other than the mortgage holder. Keeping these basic steps in mind will help you to identify many scam artists who are out merely to get their hands on your money or property.

When you’re ready to approach your lender about a home modification loan make sure that you are well prepared. Gather all of your financial information, learn about your available options, and meet with a financial counselor to learn the steps you need to proceed. Nothing is more frightening than realizing that you could lose your home and for many facing that step is not necessary. There is real help and guidance to help you avoid that step.

The fact is that many people are facing foreclosures these days through no fault of their own. Your home should be your unique place of refuge and safety from everything in this world. When you are faced with losing it you are dealing not just with a financial issue but an emotional one as well. Even though times may be very difficult, it is important for you to tread lightly and with great care. Getting a home modification loan may be your safety net but it comes with many dangers. The process can be overwhelming but there are government sponsored services to help you through it. Make sure that you consult with approved experts either from the government or your own lending institution so that you are not steered in the wrong way causing you more problems in the future.

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