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Loan Modification for a Better Mortgage

A homeowner may choose to get a loan modification if their mortgage is higher than they can afford. President Barack Obama recently unveiled a loan modification program as part of his effort to help millions of Americans avoid foreclosure and modify their risky loans.

What Is a Loan Modification?

Loan modification is when a bank or a third-party company negotiates with a homeowner’s bank in order to get them a lower interest rate. This can save the homeowner from foreclosure.

Obama’s plan requires loan services to reduce loan amounts to no more than 31% of a borrower’s gross income. In order to reduce payments, loan services and providers have to reduce the borrower’s interest rate to about 2%, and if that doesn’t lower the loan amount enough they can extend the life of the loan to 40 years rather than 30.

Banks are offered a cash incentive under Obama’s plan. For every loan they modify, they get $1000. For each year the homeowner makes their payments - up to three years - they get an additional $1000. For each year of the first five years after modification that a borrower pays on time, the homeowner will have $1000 knocked off their total loan amount. There are two reasons for this. First, it gives banks a monetary reason to help homeowners who meet certain requirements. Second, it encourages people to pay their mortgages.

This is a great opportunity for Americans whose credit and equity problems make them ineligible to refinance their loan. Also, modifying a loan does not mean that a homeowner will have to pay new closing fees, attorney fees, survey and appraisal fees, or taxes that they might have had to pay if they refinanced their mortgage.

How Does One Get A Loan Modification?

Banks offer loan modification, or a homeowner may choose to modify their loan using a third party business.

In order to qualify for loan modification under Obama’s plan, a homeowner must have a loan that originated before January 1, 2009, must have a current mortgage whose payments are more than 31% of their gross income each month, and must live in a single-unit property worth less than $729,750.

Applicants must be able to prove that they will be able to pay the new loan amount. There is a lot of detailed financial paperwork involved, including an exact list of monthly expenditures and proof of income.

A homeowner may also have to prove the hardship that got them into their current mess. Examples of hardship include divorce, loss of income, the death of a spouse or family member, or military relocation. A hardship letter should be included with the application.

If someone doesn’t want to mess with the paperwork or feels intimidated by the process, they can hire a third party company to handle it for them. The homeowner should be aware that these companies often charge a large up-front fee.

Loan modification companies promise to complete the modification process in 2-8 weeks. They negotiate with a homeowner’s bank to consolidate their debt, reduce their interest rate, increase their credit score, convert their mortgage from an adjustable to a fixed rate loan, reduce loan balances, and waive late fees. The company proves to the bank why a customer deserves a modified loan as well as why it is in the bank’s best interest to provide the modification.

Loan modification is great way for people who have serious financial difficulties and would otherwise lose their home to foreclosure. Obama’s plan gives homeowners the legal ability to fight for better rates on their home loans. They can keep their current mortgage, but get a fresh start in managing their finances and keeping their payments up to date.

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