The pros and cons of loan modifications

There are several advantages to a loan modification that out weight its disadvantages. In a declining economy and real estate market, a loan modification has gained popularity and is the single most essential tool for stopping a foreclosure.

The stimulus package being advertised by the Obama administration is heavily influencing the mortgage industry in regulating loan modifications for distressed homeowners. Loan modifications are handled by service companies and do not require a new appraisal or closing costs.

Among the several reasons to apply for a loan modification, the main reason borrowers (homeowners) request for one is to generally avoid foreclosure. During the foreclosure process, the lender is not likely to grant a mortgage loan modification unless there is a realistic chance that the homeowner will be prepared to meet future responsibilities.

The regulation of loan modifications

Loan modifications in the short past have not been carefully structured by loan modification companies and loss mitigation departments. This resulted in many re-defaults by several homeowners and borrowers within a short period of time. Today the Obama administration has carefully regulated laws towards loan modifications and has dramatically reduced re-defaults.
What you get from a loan modification

• The balance on the mortgage loan can be adjusted if it is determined that the outstanding balance exceeds the existing value of the home
• Mortgage rates will most likely be converted to a fixed rate rather than a variable rate
• Interest rates may be lowered
• A combination of the above things mentioned can be done in order to reach a reasonable payment based on the financial situation and hardship of the borrower
• The loan term can be modified to a longer term to allow a longer repayment plan

During a loan modification, lenders or service companies are paid a fee to process a loan modification. The homeowner should expect to provide documentation of their finances and prove that they have the ability to maintain the new proposed mortgage payments.