It's been nearly a year since we witnessed a financial meltdown of epic proportions. Banks on the verge of collapse laid-off tens of thousands of employees and sought assistance from the government. It was amidst this financial meltdown that light was finally placed on the difficulty that many homeowners face as adjustable rates were reset and the weight of home price depreciation led many into foreclosure.
The significant distress that banks and homeowners found themselves in led to a loan modification boom. While loan modifications have existed for a long time, it wasn't until recently that modifying a loan was seen as plausible solution for many homeowners. This is due to the number of foreclosures seen nationally since 2006, and the resulting home price depreciation. However, a recent government initiative called the Home Affordable Modification Program, enacted in March, has heightened the awareness of homeowners and banks to this process.
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It's a result of this awareness that many lenders are reaching out to homeowners that they feel might be under duress in order to "help" people stay in their homes. Also, many homeowners are reaching out for information about loan modification or seeking representation in order to fend off foreclosure or to improve the terms of their existing loan. This is all done with the intent of making their mortgage payments affordable and to decrease the likelihood of foreclosure. By and large, this process hasn't yielded the type of results that many would have hoped for.
With a lack of resources at the banks to even adequately service existing loans and the haste that many homeowners experience as they find themselves edging toward foreclosure-no wonder mistakes are made!
Here are a few key points to be mindful of when considering loan modification:
1. Banks are increasingly reaching out to accountholders before a loan modification request has been filed. The terms offered often times work to the benefit of the bank and to the detriment of the homeowner. At times the proposal may not be much of a modification at all, but rather some basic restructuring of back payments. It is important as a homeowner that you know what the guidelines of the bank are. It is possible for the bank to notify you that you don't qualify for a modification when you, in fact, do. Knowing Federal guidelines regarding hardship and understanding the banks qualifications for whether you can afford the home are a key to your success. The Federal guidelines are fairly standard, but unfortunately the individual qualifications for your lender varies quite widely and may not be easily ascertained.
2. A part of the modification process is to identify some sort of hardship and display that it will be difficult to make your payments under its current structure. As an individual you may qualify for a loan modification under Federal guidelines, but since you're not late on your payments, your bank may not see much of a need to address your needs for a modification. In order to get on the bank's radar you may ultimately have to become late on your mortgage, but the consequences to your credit may be lasting and damaging. Ultimately it is about meeting certain criteria regarding your cash flow, debt-to-income, and equity. However, how this is verified or communicated to the bank can make all of the difference in the results. While it is important to be truthful, there is a real possibility that the bank may deem that you can't afford the home and a modification isn't an option. It is important to know where you stand relative to these metrics before you make any hasty decisions.
3. A common mistake is that individuals wait too long before they choose to modify, or they aren't aggressive enough. If you are at risk of foreclosure because you're a couple months behind it is important to be on top of things. If a bank loses your file, you need to be on top of it and make sure it is recognized. If they require additional information, you can't wait for belated notification. It is an arduous process and it pays to know exactly what the banks need and what they have on file. If you're diligent, it can take weeks of calls to just get all of the information entered into the system and have the prospect of having a negotiator assigned to your loan. For many that are up against the clock, it may be unpractical to go it alone. For others, they may not have the time or the inclination, and may find it easy to get discouraged and give up.
4. One of the worst mistakes is to let the home go through foreclosure. This is a costly and damaging process financially and psychologically. It's important to realize where you stand and what your options are. Once evicted, it won't be an easy task to find the right place given your credit history, and come up with the money necessary for first and last and any security deposit. Renting can be a tough road for those with poor credit.
5. Many homeowners are faced with different choices between a modification, bankruptcy, credit repair, or debt negotiation. Ultimately you may be a candidate for more than one step, but the first step taken is key to getting the best results. Realize that attacking one of these areas may ultimately hurt your chances for a better result in another. For example, seeking to negotiate your debt may place your ability to do a loan modification in jeopardy. Unfortunately, there isn't a one-size-fits-all approach. Therefore, weighing the amount of debt and the potential results of the negotiation may help you make the best decision.
Despite promises of making the modification process fairly uniform and easy, the reality is that it's not. The range of possible hang-ups are great, particularly when you're dealing with under-staffed lending institutions that are making the decisions regarding modifying these loans. You might be dealing with a company that was bought-out or may have just been seized by the FDIC. You may lack the proper information regarding what the bank needs, or may just have trouble knowing how to present your case to the bank to show eligibility. For many, they lack the needed time to call repeatedly and the hours on hold. If things run smoothly, plan on about 40hrs to modify a loan. If you have a lender that is swamped or in transition it may take longer.
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