In many circumstances people who need a loan modification also need to file bankruptcy. The reason is simple. If a person can’t afford their home, it is probably because they have other debt they can’t afford as well. This person needs to file both bankruptcy and get a loan modification to afford their “lifestyle.”
The reason I say lifestyle, is because people have a choice. There are many people that want what I call “the best of both worlds.” They want to get out of debt and keep all of their property, even if it is unaffordable.
Keeping your property through loan modification.
There are many things people need to understand about loan modifications. First, not everyone qualifies for a loan modification. Second, if a person does not qualify for certain loan modifications subsidized by the government, then the mortgage company does not have to offer a loan modification. Third, if you can afford your mortgage payment, you will likely not qualify for a loan modification. And lastly, if you have equity in your home, then you probably do not qualify for a loan modification.
Not everyone qualifies for a loan modification.
Loan modifications are a tool for people who can barely afford their home and need assistance to keep it. These are people that are paying a week or two late and/or missed one or two payments. Loan modifications are not designed for people who only have enough income each month to pay half of their mortgage payment. In most cases, the modified payment will be equal to and in some cases more than the original monthly payment. The modification allows people to catch up on the payments that the home owner fell behind on.
Income and equity affects loan modifications.
Homeowners who have enough income to pay for their home in most cases do not qualify for a loan modification. If a person can afford their home, they do not need a loan modification.
Additionally, in most circumstances, if a person has equity in their home, then they will not qualify for a loan modification. The theory: The home can be sold to pay the loan in full. Everyone breaks even or makes money. It is basically a win win situation for everyone.
What are my options?
Do the loan modification
There is no harm in attempting to qualify for a loan modification. Depending on your situation, the modification might be extremely beneficial or not at all. You won’t know unless you try. However, do not go into the process expecting magic and/or approval.
Make sure you send in all the required paperwork. I always tell clients to send them in two or three times. Label your documents, make it easy for the mortgage company to review and approve your request. Mail it, fax it, scan it and email it. Be proactive in the process.
If the mortgage company denies you, then make sure there is an actual reason that your loan modification is denied. Try again if the reason was for failure to provide required documents.
If your loan modification is approved, then you must review the terms of the new agreement and accept or deny it within the time given. Do not delay in your communications with the mortgage company.
Refinance your home
Refinancing your home can be extremely beneficial. In many cases you might be able to reduce your interest rate, which in turn will reduce your monthly payment. If your home has equity or your income is high enough then you might qualify for refinancing. You can try different mortgage companies, banks and other financial institutions to see if they are willing to refinance your loan.
Make sure you shop around for the lowest interest rate. Read all the terms of the agreement. Make sure you understand everything you sign (e.g. interest only, fixed rates, APR, etc).
Change your lifestyle
If a person’s income hasn’t changed for 5 years, cost of living is increasing, necessary expenses are rising etc., then something has to give. At a certain point, a person really needs to look deep into their situation and determine if keeping the home is worth the stress and financial burden.
So many times, people will do anything to keep the home even if it means working two jobs, borrowing from Peter to pay Paul, taking out another line of credit, cashing out 401k, using credit cards to pay for necessary expenses and so on. Then they hit that breaking point. Now they have too much debt and are on the brink of losing the home anyway.
However, there are always more options. One of which is bankruptcy. It can get most people out of debt and is also a tool to help save homes. Additionally, it can help people budget their lives.
There are two main types of consumer bankruptcies, Chapter 7 and Chapter 13. Below are links to learn more about the different types of bankruptcy and how they can help each individual situation.