Loan modification refers to permanently altering the terms of a home mortgage loan to reduce payments. It is important to note the principal balance is not reduced, even when home values are less than the amount owed on the mortgage note. Instead, servicing lenders reduce interest rates and extend payment terms by up to 40 years.
Under Obama's loan modification plan, mortgage lenders and borrowers can receive financial incentives of up to $1000 per year if home loan payments are paid in full and on time each month. Banks can receive a maximum $3000 incentive, while borrowers can receive a reduction of up to $5000 off their home loan principal.
President Obama's 'Making Home Affordable' plan was initiated to help borrowers with Fannie Mae and Freddie Mac loans obtain a modified loan or refinance mortgages. Presently, these options are only available to borrowers who originated their home loan on or before January 1, 2009.
In order to obtain a bank loan modification, borrowers must work directly with their lender's loss mitigation department. Recently, loss mitigation has made headline news because borrowers are finding it increasingly difficult to reach their mortgage lender to determine if they are eligible for loan modification programs. For this reason, borrowers must plan on being diligent in contacting their home loan service provider.
In addition to calling lenders, borrowers should send a certified letter with a return receipt request to their bank. The return receipt request requires a signature from a bank representative before it is returned to the sender.
Once the signed receipt is returned, attach it to the loan modification hardship letter to show proof correspondence was received. While this action does not guarantee loan modification approval, many lenders become more proactive in tending to borrowers modified loan requests received by certified mail.
One of the biggest mistakes borrowers make is procrastinating about contacting their lender. In previous articles I have discussed the phenomenon of 'foreclosure freeze'; meaning borrowers become frozen with fear when it comes to saving their home. It is important to remember that banks do not want to repossess homes, they want their money. Borrowers who qualify for a bank loan modification and can offer a reasonable payment plan can avoid foreclosure by being proactive.
Another mistake borrowers make is falling for home loan modification scams. When banks issue Lis Pendens preforeclosure notices the document becomes a matter of public record. Many loan modification companies scour court records to solicit business. Realize there is no need to pay anyone to help obtain a loan modification. The exception to this rule is when borrowers elect to hire a real estate attorney or homeowner advocate.
Borrowers can obtain no-cost housing counseling through the Department of Housing and Urban Development (HUD) or Affordable Housing Centers of America (ACORN). At present, ACORN is working with 43 major U.S. lenders to help borrowers restructure their mortgage through the Home Equity Loss Prevention (HELP) program.
Homeowners struggling with their mortgage loan payments can obtain information and resources at MakingHomeAffordable.gov. This government website provides links to HUD-approved housing counseling agencies; worksheets to help borrowers determine if they qualify for federal loan modification or refinancing assistance; and links to participating Making Home Affordable loan service providers.
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