A loan modification is an adjustment to the terms of an existing mortgage loan and is an alternative offered by the original lender to a borrower that can’t afford to pay the current terms of their loan or have the ability to refinance. A loan modification can change any or all of the following
- the loan balance
- the interest rate
- the loan term
And it can be either permanent (for the life of the loan) or temporary. To put it simply, it is an efficient way for the borrower to get in a better financial setting with no out-of-pocket money.
Stories of Loan Modification Horror
Most people are still confused about what a loan modification is. The horror stories that have been reported also make it sound scary, and tend keep borrowers at bay. The lack of response and accommodation by lenders in the past couple years have made it seem like loan modifications are impossible. In the last couple of years however, new government programs and subsidies have made a loan modification more obtainable and easier to accomplish than ever.
What to Look for:
Depending on a borrower’s situation, there are three types of loan modifications possible.
- Is this your main residence property?
- Is this a rental or vacation property?
- Is the original lender:
- Bank of America
- Citi Mortgage
- Wells Fargo
Once all of these questions are answered, it can then be determined if a borrower is eligible for a Loan Modification. In an attempt to make Loan Modification not so confusing or scary, let us breakdown the options:
HAMP Tier 1 is the most popular loan modification and is the most commonly used product on the HAMP Program. This is for the owner-occupant property that is 1 to 4 unit. This is the first Loan Modification that lenders will suggest to borrowers.
The HAMP 1 is a “step up” Loan Modification which means, the payment is began at an amount the borrower and lender agree upon that the borrower can afford comfortably. It is then increased each year to the original payment and will remain the duration of the loan modification.
For those that aren’t eligible for HAMP 1, another option that is not as well known is the HAMP Tier 2 Loan Modification. This is for property that are not owner occupied as well as occupied 1-4 unit properties. Any borrower that seeks Loan Modification and is turned down for HAMP 1 should definitely apply for the HAMP 2.
Department of Justice Loan Modification (DOJ)
Even more less known than the HAMP 2 is the DOJ (Department of Justice) Loan Modification. Even as the less famous of the lot, this type of modification could be the best possible solution for a homeowner because it allows a large reduction in principle for the borrower. But there are some drawbacks. The original loan must be with one of the lenders listed above and should the lender deny the DOJ Loan Modification, there is no process to protest that decision.
What to look out for – Loan Modification Scams
As with most anything involving financial gain these days, loan modifications have their share of scam artists to be aware of. For example, homeowners may be contacted by parties that claim to have been in contact with the borrower’s loan servicer and has worked out a lower mortgage payment on the borrowers behalf. This modification is available to the homeowner…. for a small fee of course. There are also scammers that will tell a borrower that the government has pre-approved them for a Loan Modifcation as well and that they can have it applied, but again, only for a fee.
In any case similar to either one of these instances, the borrower needs to contact their lender direct and verify this offer. More often than not, it is just a marketing ploy to gain customer interest and there has been no approval for any of these three Loan Modifications.
Any time a borrower is approached by one of these types of offers, or any offer that is not direct from the original lender, err to caution and make calls to verify. There are good loan modification assistance companies out there, many of which operate not-for-profit. Always do your due diligence before paying anyone for modification service.
Read more about Loan Modification Scams here