When you are behind on your mortgage the first thing your lender will do is push you to get a loan modification. Let me explain why as a borrower a loan modification does not work in your best interest. There are many misconceptions of loan modifications and they are very misleading. There are many foreclosure preventative options and as a consumer you should research all of them before you jump into this process.
1. Receiving loan modification paperwork does NOT mean you are “pre-qualified”
In my experience, many of my clients have told me they received loan modification paperwork in the mail so that means they are pre-qualified. This is NOT the case. The lender does not even look at your credentials. These documents are part of an automated process. The same automated process that sends you letters every month when you are behind or new options are available. The majority of the time you do not qualify for a loan modification. This process can take anywhere from 6 months to several years to determine if you qualify. Meanwhile the balance of your loan is still increasing and nothing is resolved.
2. A loan Modification does not reduce the loan balance.
A lot of borrowers think that if they go through this loan modification that their balance will be reduced and their payments will be lowered. The lenders will not take a loss on all the missed payments and missed interest that is accruing while you are in the loan modification process. If by some miracle you do get qualified, your missed payments and accrued interest will be added to the principal balance. The lenders are getting paid to work on your now defaulted loan and there is no rush to get this done quickly.
3. You have to qualify for a loan modification
If you cannot qualify for a new loan with your current income you are not going to qualify for a loan modification. The majority of the time the borrower is in a financial hardship which put them in the situation where they need the loan modification. If they can’t afford to keep making their payments due to the loss of income it makes no sense to even do a loan modification. The problem is the lender does not allow enough flexibility for the homeowners to actually reduce their loan payments. You will not qualify and as the result put yourself farther in default. After going through this whole process you will see the real “terms”. The payments are only temporarily reduced, and after time they are increased significantly to make up for the payments missed and interest accrued!
In conclusion no lender is OBLIGATED to do a loan modification. You could go through the whole process and the lender can just say “No”. If you are struggling to make your mortgage payment due to a hardship the best option as a foreclosure preventative is a short sale. You should always get legal counsel as every situation is different.