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What is Mortgage Loan Modification?
Simply put a loan modification or mortgage modification is the change in terms of the original mortgage loan agreement. Loan modifications are common for many reasons but two of the most common reasons are: the current housing crisis which has caused home values to drop below the amount a borrower has financed or borrowed to purchase a home, and the spiraling effect which the mortgage/housing crisis has created on employment making it impossible for some homeowners to continue paying their mortgage payments. In the loss mitigation industry this is referred to as financial hardship. Now let's look at what mortgages are, the different parts of mortgage loans, and then let's talk about how they can be modified.
Mortgage loans in context of Loan Modification
A mortgage to a borrower is debt, a financial obligation or money borrowed in order to purchase an asset. In our case the asset is almost always a home. A mortgage to a lender is the asset and the home is collateral toward the debt or mortgage. Otherwise a lender invests in a borrower and a borrower invests in a home. The dynamics of these assets are highly interconnected for both parties and understanding a borrowers needs vs. a lenders threshold is important in achieving a successful loan modification.
The different parts of a mortgage loan and differnet loan modification techniques
A mortgage loan at its core consists of two parts. Part one is the principal of the loan and part two is the interest rate. The principal is known as the amount of the original loan and the interest rate can be referred to as the cost of the loan's principal. Consider this example: When the economy was in good shape, people were buying homes and home values were going up, at the same time lenders had the ability to increase the cost of these loans, otherwise charge higher interest rates, but now that there has been a one hundred and eight degree turn in the housing market these costs must decrease so that the borrower's monthly out of pocket cost is decreases and as a result is able to continue paying the lender for the loan. Understanding the balance between the amount or threshold of a lender and a borrower is the job of Trinity's Loan Modification experts.
Loan modifications can take on many shapes and forms. Some of the most common loan modification techniques include:
Interest rate reduction is common because in the last five to six years many home buyers used subprime loans to purchase. These loans started off with a low interest rate but later readjusted to higher interest rates causing mortgage payments to increase significantly. When this dynamic is combined with job loss or falling home values it often makes for impossible financial situations and requires an immediate look at loan modifications.
Principal reduction like interest rate reduction can be achieved on its own or in tandem with other loan modification options. A professional loan counselor from Trinity will determine your options based on your financial hardship and the lenders threshold. Principal reduction may be used to reduce the amount of the debt in turn reducing the monthly payments and allowing a borrower to stay solvent and continue paying for and living in their home.
At times an individual's financial hardship may have been caused by temporary factors which have caused an accumulation of significant late fees, penalties and delinquency charges. With proper negotiation a Trinity Loan Modification consultant will have the lender forego these fees so that your payments will continue to apply to the mortgage and you can move forward with your future.
Sometimes it makes sense to increase the length of the mortgage loans time horizon. Otherwise a lender would agree that the borrower fulfill their debt obligation over a longer period of time then originally agreed upon. In essence stretching out the payments, and making it more affordable for the borrower.
Last but not least a lender may agree to accept payments based on a certain percentage of households income. This allows both the borrower to continue living n the home, build equity, and reduce the mortgage amount while the borrower does not have to prepare the home for a foreclosure auction and is satisfied with the interest and principal payments.
These are examples of the most common loan modification techniques however mortgage modification techniques differ form one households financial hardship to another's further housing markets in different geographic areas have been affected differently and a lenders threshold may vary from one are to another. It is also important to not that a borrower may qualify for one or more of the loan modification techniques listed above.
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