Opportunity Disguised as Loss
It's no secret that homeowners today are faced with some of the most daunting mortgage situations ever. If you were lucky (or savvy) enough to escape the housing market meltdown and hang onto your investment, now may very well be the perfect time to reap some of the benefits created by the demise of those less fortunate than yourself. By all means, be opportunistic, their loss needs to be your gain to level the field a bit.
What It Is and What It Is Not
By definition, a loan modification is a permanent change in the terms of your loan which allows it to be reinstated, and results in a payment that you can afford. A loan modification is designed to prevent you from going into default, and in some cases will only provide you with a lower interest rate for a specified amount of time.
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Loan modification is not refinancing. In fact, if you are able to refinance, it is generally faster and easier to go that route. Of course, there are other factors and considerations when considering refinancing in this instance. Opting to refinance rather than modify your loan removes any protection for you against the lender collecting a delinquency judgment should you end up in foreclosure anyway.
Loan modification is not going to make your arrearage disappear. In some cases, you may be given the opportunity to spread the arrearage out over the new term of your mortgage. In other instances, depending upon the lender, you may have to repay the arrearage amount over a shorter period of time.
Who is Eligible
Loan modifications were once only available to those who could show a definite need or financial hardship in the form of divorce, loss of a job, loss of a spouse, illness or other similar situations. While these are still viable reasons to apply, a new category has been added to include those people who are in adjustable rate mortgages and who will not be able to make their payments once the rate becomes variable, or who are not making their payments already for the same reason.
Something to keep in mind if you are divorced or separated and your spouse is still on the mortgage; the rules for loan modification will apply to both of you regardless. That means, that if your spouse is unemployed, that will be a consideration in the lender's decision as to whether you will be a good repayment risk for modification.
Advantages vs. Disadvantages
The biggest advantage, and the reason lenders are hesitant to offer loan modifications to begin with, is that the loans usually result in a substantial decrease in the amount of interest you can expect to pay over the life of the loan. Because most lenders make their profit from interest, this is not a desirable solution. However, in place of the expense of foreclosure or default, a loan modification is an attractive alternative.
Another advantage you will see from a modification is that you will not pay any fees; closing, attorney, legal or otherwise. From a consumer standpoint, this reason alone makes modification worthwhile over refinancing. From the perspective of the lender however, a loan modification offers less risk protection, as the lender cannot collect a deficiency judgment against you should you end up in foreclosure anyway.
The only disadvantage of loan modification, from a borrower's standpoint, is that a loan modification cannot be used to increase the amount of the loan; you can't treat it like a refinance and take out equity.
Summary
Before embarking on your quest for the perfect repayment plan to save your investment, be sure that you actually need a loan modification to begin with. If a refinance will get you into a fixed rate mortgage, and you are not behind in your payments, do it. It will be faster and easier. If you find that you will have to file for loan modification, do a bit of research to make sure that you are dealing with a reputable lender -- right now scammers abound in a market of plentiful victims, so be careful. Make sure that you are applying for the best possible advantages available to you, and that the terms will be manageable for you in the long-run even if you are faced with hardship again.
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