Do Foreclosure Modifications Work?
A foreclosure modification is actually a loan modification. A loan successfully refinanced or modified with the cooperation of the lender helps avoid foreclosure. Modification programs work if the home owner makes payments as agreed on the new loan. However, there is no guarantee that a lender will agree to loan modification.
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Advantages
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Loan modification allows lenders to change any or all terms of a mortgage agreement. This is often a huge benefit for the debtor. For example, a lender could significantly lower the interest rate, change the loan from an adjustable rate loan to a fixed term or even add years to the term of the loan to significantly lower the monthly payment, perhaps by as much as several hundred dollars.
Challenges
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Getting a lender to agree to foreclosure is one of the biggest challenges in the process and a key reason why some attempts at modification fail. At the height of a recession or housing crisis, a lender may have more requests for loan modification than it can address in a timely way. That could lead to a debtor losing a home to foreclosure because he could not afford the payments, although a loan modification might have made the payments affordable.
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Qualifications
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Loan modification attempts may also fail because the debtor simply cannot qualify for the loan because of poor credit or unemployment. Lenders realize that people unable to make their mortgage payments are probably suffering from other credit problems, as well. However, the lender is unlikely to approve a loan modification plan if the debtor appears on the verge of bankruptcy or does not have the income to support even a much lower monthly mortgage payment.
Alternatives
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There are options a lender can provide that fall short of a complete loan modification. Once the debtor completes paperwork and gains approval, the options usually work and end the possibility of foreclosure. One option -- forbearance -- allows lenders to temporarily modify the loan to allow lower monthly payments or suspend payments entirely, while a debtor works through a hardship, such as unemployment or illness. Another program called reinstatement allows debtors to stop foreclosure by making up missed payments in a lump sum, sometimes by a certain date. For example, a lender may temporarily reinstate the mortgage with the debtor required to pay three missed mortgage payments in 90 days. As in complete loan modification, the success of the programs depend on the debtor's ability to follow through with terms of the agreement.
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