Is loan modification a better option than foreclosure?

On Behalf of | Aug 13, 2021 | Foreclosure |

With the threat of foreclosure moratoriums expiring, many Americans are facing not only a seemingly endless struggle to make ends meet, but also the prospect of losing their homes. Even with stimulus checks to help in the short term, many people are still dealing with debt that they can’t seem to get out of.

Some people in Michigan who have been unable to make their monthly mortgage payments may feel there is no way out of foreclosure. There are other options, however, especially for Detroit-area homeowners who are able to negotiate new mortgage terms with the lender, allowing them to keep the home and preserve their credit at the same time.

What happens with a foreclosure?

There are situations where it seems that the best option is to allow the home to go into foreclosure. In an underwater mortgage, for example, the current market value of the home is lower than the principal owed. Homeowners who have very little or negative equity in the home sometimes decide to stop payments, allowing the house to go into foreclosure. This is called a strategic default.

There are shortcomings to this approach. First of all, a mortgagee who has a gone into foreclosure may have difficulty obtaining another loan later on, as the foreclosure remains on their record for a long time. Secondly, allowing the home to go into foreclosure does not always end the owner’s problems. If the proceeds from the foreclosure sale are insufficient or less than the outstanding balance on the mortgage, the lender can go after the delinquent homeowner through a deficiency judgement.

What is a mortgage loan modification?

Believe it or not, banks are not eager to be involved with foreclosure sales and are more than likely to prefer to discuss other options with the mortgagee. If the homeowner qualifies, a mortgage loan modification may be the best solution for all parties. Unlike a refinance, a loan modification changes the terms instead of replacing them, as would be the case for a refinance.

Some modifications on the table can include:

  • Changing from and adjustable-rate to a fixed-rate loan
  • Extending the terms of the loan
  • Lowering the payment on the principal amount each month
  • Adding any missed payments to the balance

Loan forbearance, if allowed, will temporarily reduce mortgage payments, but the terms of the modification are up to the lender. A loan modification can affect your credit score over the short term, but by building a record of monthly payments and then eventually reverting to the original terms of the mortgage, the homeowner can restore their credit over time.