Understanding Loan Modification



I have been asked by several friends and yes even some family members exactly what is a loan modification and how to avoid foreclosure?  I am a real estate broker with 20 years experience so here is a simple explanation for anybody that’s interested.  

By now most people have heard of some form of mortgage help for struggling homeowners to help them stay in their home and avoid foreclosure.  One process for doing this is known as Loan Modification.  Before I explain the details of a loan modification; let me give a little bit of information on what a mortgage is and the power it possesses.  

Banks and/or mortgage companies will lend prospective homeowners the amount of money it takes to buy a home provided the homeowner is willing to sign a piece of paper known as the security deed or simply put the “mortgage note”.  This promissory note states that the borrower can continue to live the home as long as they continue to make monthly payments to the “guarantor of the loan” or bank.  

If the homeowner falls behind or stops making the monthly mortgage payments, then the bank will start a process that’s commonly called “foreclosure”.   Several states including Georgia, Michigan, Missouri, North Carolina, New Hampshire, Rhode Island and Texas have what’s called non-judicial foreclosure laws, meaning that the bank and/or mortgage company is not required to go to court in order to have you removed. 

They can simply advertise the home in the county newspaper where the home is located for four consecutive weeks and then sell the property to the highest bidder, the first Tuesday of the following month on the county courthouse steps. 

Okay, remember when I said that the bank guarantees a loan to the prospective homeowner, this is done with the idea of making a huge profit over the course of the loan in the form of interest.  This interest is compounded daily over a 15-30 year period and sometimes as longs as 40-45 years.  Banks are hedging the monies earned from this future interest to make other investments and thus would like to keep the homeowner in the home for a very long time.

Whenever someone is unable to meet their obligation and make their monthly mortgage payments, this is very bad news for the banks, investors and anyone else with a vested interest in these assets.  Foreclosures become non-performing assets; and since shareholders don’t take too kindly to this most if not all banks are willing to work with homeowners to keep you in the home. 

Inside each bank is a loss mitigation department and it can exist within the company or as a third party entity working on behalf of the homeowner.  It has been my experience that working directly with the banks internal department has its benefits.  There are three different levels of help available depending on the individual needs of the homeowner.   

Loan modification often includes a partial payment of any amount in arrears and then an extension of the loan terms to compensate for the remainder of the amount in default. Forbearance will allow you to delay or reduce payments temporarily with the understanding that at the end of that period another option must be used to bring the loan current.  

And finally, a deed in lieu of is usually the last resort.  This will allow the homeowner to give the deed to the home back to the bank and continue to live in the home as a renter until the financial situation has improved; usually for a period of up to three years.

You can find an FHA approved loan counselor by visiting the Dept. of HUD website: http://www.HUD.GOV or by calling (888) 995-HOPE.  If you have a conventional loan or one that was not guaranteed by the Federal Government then you can also call your bank or mortgage company and ask to speak to a Loss Mitigation Counselor.  By all means, if you are unable to make your monthly mortgage payments call your lender ASAP.  They have several programs available in an effort to keep those non-performing assets off of their books.


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