How Does a Loan Modification Work?
Loan modifications are helpful tools for homebuyers. Here’s everything you need to know about them.
Loan Modifications: What You Need to Know
If you’ve fallen behind on your mortgage payments -- or you think you’re about to, you could be in a sticky situation. You want to keep your home and avoid defaulting (or contributing to default) on your mortgage, but you’re not sure what to do. One potential solution may be a loan modification program, in which your lender amends the terms of your home loan in order to make it easier for you to pay them back.
Loan Modification Can Make It Easier to Pay Your Mortgage
In order to help you make your monthly payments and avoid a potential foreclosure, a loan modification may be able to:
Reduce your interest rate
Lower your monthly payment
Extend the term of your loan
The downside of loan modification is that, since you may be paying smaller monthly payments over a longer term, you’re likely to be paying more money in interest overall during the life of your loan.
The Home Affordable Modification Program (HAMP)
While it expired in 2016, for several years the Home Affordable Modification Program (HAMP), sponsored by the U.S. Department of the Treasury, provided a series of guidelines and incentives for lenders and investors to modify borrowers’ loans in order to make it easier for them to keep their homes. Fortunately, though the program no longer exists, many lenders have created their own loan modifications loosely-based upon HAMP guidelines.
Other Methods to Help Prevent Foreclosure
If you can’t negotiate with your lender in order to receive a loan modification, and your lender intends to foreclose on your home in order to recoup their investment, there may be one final way to save your home: a Chapter 13 bankruptcy. If you qualify for this kind of bankruptcy, your lender will be forced to immediately stop all foreclosure proceedings, and will typically have to give you some time in order to correct your mortgage default.
The exact proceedings can differ from state to state, since in some states, a lender has to file a lawsuit in order to foreclose on your home. Under Chapter 13, homeowners may have as much as five years to make up their missed mortgage payments. Usually, homeowners will make their payments to a third-party bankruptcy trustee, who will then, in turn, pay the lender.
Beware of Loan Modification Scams
Finally, it’s important to be aware that there are a lot of unethical companies and individuals who claim that they can negotiate directly with your lender in order to modify your loan. Most of the time, these are not legitimate -- and a few of the major warning signs include:
Requesting an upfront fee for loan modification
Telling you to sign paperwork without reading it
Asking you to send payments to a party other than your lender or servicer
In addition, some scammers may even tell you sign over the title to your home, which could end up being a financial disaster. That’s why it’s always important to do your research and avoid paying money to anyone without taking the proper precautions.