The last couple of years has seen many foreclosures on mortgages because the home prices have fallen drastically. Sometimes, it also so happens that you may fall behind your mortgage payments because of either losing your job or some other reason. This is the time you will have to seek the help of the lender before the mortgage plan is foreclosed or evicted.
This scenario has made many banks start with loan modification programs to prevent losses and foreclosures which have put more downward pressure and the home prices have dropped down drastically. Things have become so dicey that many banks have started their own streamlined loan modification schemes to mitigate standard losses.
Mostly, what you need is forbearance where you are allowed to pay reduced amounts for almost six months till you get a new job. On the contrary, sometimes it so happens that you are forced to take a new job that pays less than your earlier ones. This will demand a serious modification of your mortgage payments that will lower your monthly payments permanently, or extend the length of a loan or forgive some debt.
One of the options of mortgage modification is simply extending the length of time. Few other options available to borrowers are:
- Repayment Plan: This is the most simple and common method adopted by many banks with regards to arrears. It is not exactly a loan modification plan but your arrears are equally divided and included in your future payments. They are ready to accept your delinquent payments and add to the current monthly payments until you are on track again. In this, the lenders are not looking into the affordability of the borrower. Since the debt is simply redistributed, there are likely chances that the borrower may default because the monthly payments have increased.
- Reducing the interest rate: One of the favorable options is reducing the rate of interest due to which the monthly payments become more affordable. In such cases, the loans are re-written, and they try to determine your payment capacity using debt-to-income ratio. The interest rate is temporarily decreased to a period of five years and the steadily increased in future.
- Extension of Amortization: Another easy and feasible way is to extend the length of the loan so that it increases the affordability and reduces the monthly mortgage payments for the borrower. Instead of 30 yr. amortization the period may be extended to another 10 yrs.
This is the most favorable option for borrowers.