As foreclosures continue to rise, homeowners are looking for ways to protect their homes from foreclosure without sacrificing their own financial well-being. An approach that has garnered a lot of attention is the mortgage modification. However, there are a lot of misconceptions about modifications, so here is a look at some of the things you should know about mortgage modifications and whether they are the right choice for you.
One of the most pervasive misconceptions is the idea that lenders are required to provide mortgage modifications. While the federal government has provided attractive incentives to encourage lenders to do so, participation in federal mortgage modification schemes is voluntary. In addition to government incentives, banks are generally more amenable to mortgage modifications because it increases the likelihood that you’ll continue to repay your mortgage if payments are more manageable.
Contrary to popular belief, you don’t have to be in default in order to qualify for a modification. In fact, the government provides lenders with incentives to offer modifications on loans that are actually current. This motivates lenders to act quickly. Many homeowners feel that defaulting on their mortgage is necessary to demonstrate true inability to pay their mortgages.
Likewise, mortgage modification is often available even in situations where you might think it isn’t option. If you’re unemployed or filing for bankruptcy, mortgage modification may still be available to you. In fact, in some cases, filing for bankruptcy might even improve your ability to get a modification – once the bulk of your debts are discharged, you may have improved ability to meet the terms of a modification reliably. If you are collecting unemployment benefits, those benefits can be used towards your overall income, so being unemployed does not automatically rule out the possibility of qualifying for a modification.
It is important to note that mortgage modification rarely affects the principal balance on the loan. The most common approach to modification is through reduced interest rates – even a seemingly minor reduction in interest can have a dramatic impact on monthly payments.
Throughout the modification process, it is helpful to remember that the bank’s key motivation is their bottom line: banks want to do what will result in the most profit. Most banks are reluctant to resort to foreclosure if they feel there is a chance that the current mortgage holder will pay back the loan under modified terms. Foreclosure is a costly and time consuming process that can often lead to deficits between what is owed and what is earned through the foreclosure sale. Modifications that allow the bank to maximize the profitability of a loan and improve the homeowner’s ability to honor their mortgage commitments can be a win-win situation. It is important to know the facts beforehand. If you are able to secure a mortgage modification, take great care to adhere to the new terms, as re-defaulting will likely result in foreclosure proceedings.