This year hundreds of thousands of American are being foreclosed on. Not only do the homeowners want to avoid foreclosure, but so do the banks. Banks do not want it to happen because they are forced to document every foreclosure and they generally take a loss on each one. It’s estimated that the average loss for a bank is over 40%! The more foreclosures in the banks books, they more likely they will fail and go out of business.
The main cause of many of today’s foreclosure problems, is bad lending practice. It used to be that buyers had to show 30% of the list value of the home as the down payment. They would also have to show a year’s worth of pay stubs to get a mortgage. Equal opportunity in lending laws meant that this was deemed discriminatory. When this was combined with an incentive structure that paid huge commissions for loan origination, loans began to be referred to as “liar loans” and the end consequences are what you see today.
Millions of new homeowners getting these “liar loans” are ill educated on what they are agreeing to by signing the mortgage papers. Adjustable Rate Mortgages, often what you hear about when applying for a loan, usually gives you a good deal in the introductory period, but when that ends, home owners are suddenly faced with double or triple monthly housing bills. All these failed mortgages and increasing interest rates have left the real estate market in shambles and it’s stuck homeowners with a mortgage that’s worth more than the probable resale value of the house.
This is where loan modification comes in. Loan modification is a negotiation technique and it can get various terms of your loan modified, like a refinance option. Keep in mind that mortgage loans are built around two terms:
1. The interest rate of the loan
2. The time period over which the loan has to be paid off
The interest or compound interest rate is the percentage of the remaining balance that the bank takes as a profit from each payment you make. Compound interest, over the lifetime of a typical mortgage, adds up to a large amount of money.
Loan modifications are either a reduction of those interest rates or an extension of the term of your loan. To get a loan modification you have to show a financial hardship that has reduced your income significantly enough to keep you from making your regular payments. You also must show that you still receive some sort of regular steady income. After you have proof of these two things, go talk to your lender’s loss mitigation department.
When applying for a loan modification, banks should be cooperative, once you start talking to the right person. Remember they don’t want a foreclosure on there books. Keep in mind though that the process can take at least 6 months to a year before happening, so plan early. Having a loan modification specialist in your corner can help you out. Much of the time spent getting the loan modification, is done trying to talk to the right people; a specialist can help you cut through all of this and save time. What may take you 6 months to a year, may take a specialist less than a month. In same cases, they may even have pre approved programs that the lender has already agreed to.
After you receive your modification and have lower payments, make sure you can realistically pay them. Cut back on other expenses, like entertainment and cell phone bills. Even then, be realistic and if you can’t actually afford the new payments start thinking about selling your home.
Many people think that keeping their home is the only thing that matters in life, but in reality, your family is all that matters and finding a new and better home is always possible. Don’t get so attached to your home that you tear your family apart trying to keep it.
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