3 Benefits Of A Loan Modification

3 Benefits Of A Loan Modification

Millions of homeowners these days are struggling to meet their monthly mortgage payments. There are several factors contributing to this including unrealistic or questionable loans being made, a bad economy, people facing high medical costs, massive job layoffs, homes losing their value, and interest rates resetting on adjustable rate mortgages (ARM). Foreclosures have skyrocketed as a result and millions more homeowners are in danger of losing their homes.

To combat the massive wave of foreclosures one solution that has been offered is loan modifications. A loan modification changes the terms on a loan to make the monthly payments more affordable. This can be accomplished through lowering the interest rate on the loan, extending the payment schedule to the loan, forgiving part of the principal on the loan, or changing the type of loan from adjustable rate mortgage (ARM) to a fixed rate mortgage. The goal of a loan modification is to avoid foreclosure, which is beneficial to both the borrower and lender. Here are three major benefits of a loan modification.

Loan Modification Benefit #1: Stop Foreclosure

Foreclosure means the borrower loses their home and the lender must try to auction the home off to recoup their loss. Foreclosure is quite devastating to the homeowner, but the lender also loses in a foreclosure. There are high costs for the lender associated with a foreclosure and it is difficult for the lender to recoup the loan amount owed on the loan through auctioning the home off. Therefore, lenders are motivated to avoid foreclosure and may be wiling to offer a loan modification to borrowers who make certain criteria. The major goal of a loan modification is to avoid foreclosure and keep the homeowner in their house by making the monthly mortgage payment more affordable.

Loan Modification Benefit #2: Lower Monthly Payments

A loan modification will result in lower monthly payments for the borrower. This will not only help the borrower avoid foreclosure but should help the homeowner get back on track with their finances. If their housing payment is more affordable there is less chances of falling behind and incurring late fees and other penalties. Setting a realistic budget for monthly expenses should help the homeowner recover from their financial hardship.

Loan Modification Benefit #3: Improve Credit Score

A foreclosure on one's credit history can have a severe impact on one's credit score and ability to borrow. Credit scores can drop as much as 200 to 300 points with a foreclosure and it could take as many as 5 years before the borrower will be able to qualify to buy another home. A loan modification will help the homeowner avoid foreclosure and they will become current on their mortgage payments. This should help improve the homeowner's credit score. The lower monthly payments should also help the homeowner get back on track on other bills.

A loan modification offers several important benefits for the homeowner facing financial hardship. If you are struggling to meet your monthly mortgage payments, you should definitely consider applying for a loan modification with your lender.