What is a Loan Modification?

Loan Modification Definition: A loan modification is a negotiated legal alteration of the terms and conditions of your existing mortgage loan, in order to obtain lower mortgage payments or reduce the loan balance, or both. In today's declining real estate market in Arizona, refinancing is available to only a select few. Getting approved for a traditional refinance is extremely difficult.

The goal of a loan modification is to change the amount of payment to a level where the borrower can consistently make their mortgage payment as well as pay other bills.

Why Would a Homeowner Want a Loan Modification? The need for a loan modification (sometimes called a loan mod) is usually caused by a borrowers inability to make payments in the agreed upon time frame or because the property is worth less than the borrower owes. If the homeowner has a little bit of equity in the home or is slightly upside down on the mortgage, and if the homeowner's current income is about 5% greater than their total current expenses, then one should consider a loan modification.

On the other hand, if the homeowner is upside down on the mortgage by 10% or more, or if the homeowner's income is 10% less than their current expenses, then they should seriously consider a short sale. 

Why Would a Bank Accept a Loan Modification? Mortgage banks would much rather settle for a loan modification than foreclose and take your home back. On average, banks stand to lose over 50% if they foreclose, and therefore would rather collect lower payments than none at all. Banks do not want a mortgage to consume an entire monthly budget. They will take the homeowner's entire budget into consideration i.e. car payments, cell phone, utilities, credit cards payments, etc.

Who Typically Qualifies for a Loan Modification? There are 3 basic criteria that most mortgage banks consider for the approval of a loan modification. 1.) The homeowner should have very little or no equity in their home. 2.) The homeowner is expected to have a total income approximately equal to, or no more than 10% of the homeowner total expenses. 3.) The homeowner's liquid savings should be no more than about 8 mortgage payments.

Arizona Passed New Legislation to Help Homeowners in Need! Arizona recently passed new legislation to help solve the mortgage loan crisis. Arizona is one of the states hit hardest by the foreclosure crisis and action was needed. An agreement was made with major mortgage banks to streamline the loan modification process.

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