Loan Modification to Get Back on Your Feet

By: Timothy McFarlin | Published: May 28th, 2010 | Category: Loan Modification

As our troubled economy continues to cause trouble for homeowners across the country, more and more people are looking for ways to recover from their financial slump without putting a strain on their credit scores.  The home mortgage loan modification is the perfect way for those struggling to make their mortgage payments to lower their monthly payments and begin the process of their personal economic recovery.  A loan modification can improve a person’s financial situation in more ways than one. 

Borrowers who are approved for a loan modification are able to begin the financial recovery journey almost immediately after they are notified that their loan has been modified.  Once a borrower is able to make lower monthly payments, the borrower can start applying more money to other debts or they may begin to save more wisely than before their modification was approved.  But more money saved every month is not the only benefit to applying for a home mortgage loan modification.

Loan modifications allow borrowers to improve their credit scores after the missed payments necessary to be approved for the modification have been reported to the credit bureaus.  If a lower monthly payment is all it takes for a borrower to pay their bills on time, then every payment made on time will count in favor of the borrower’s credit score.  If the borrower is able to pay off other debts thanks to the savings offered by a loan modification, their credit scores will reflect this as well.   

Should a borrower’s situation improve to the point of wanting to sell the home attached to the modified loan, future lenders will see no mention of the loan modification on the person’s credit report, unlike borrowers who are forced to opt for short sales, bankruptcies, or foreclosures.

Loan modifications also have their fringe benefits as well.  For starters, a person who appreciates their privacy can keep the details of their financial hardship out of public record by applying for a loan modification instead of filing for bankruptcy.  All matters discussed during bankruptcy proceedings become matters of public record because the bankruptcy court is a court like any other in the U.S.  Loan modifications are agreements between the two parties of a contract, which means the details of a loan modification stay out of public view as long as both parties agree to stay out of the court room.

Another benefit to being approved for a loan modification is that there are no tax penalties involved with a modification.  Short sales, however, can incur tax penalties in some states that view a forgiven debt as earned income.  Also, when a person completes a short sale, they can be liable for the remaining debt on a loan, assuming that the lender wants to pursue the collection of the remainder of their loan, which they reserve the right to do.  A modification avoids this problem by requiring the lender to approve the changes to the terms of the original mortgage contract.  If the lender agrees to change the terms of their original contract, they may not pursue damages for the amount of money that would have been paid had the contract remained unchanged. 

This is not to say that short sales and bankruptcies are not viable options for saving a home from foreclosure, only that a loan modification carries with it the least amount of negative consequences and the greatest chance for economic recovery for the borrower.  If a loan modification request was denied, a borrower should not be afraid to pursue a short sale or bankruptcy after discussing their options with a local real estate / finance attorney.

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