A loan modification is an agreement between two parties to a contract. If both parties agree to modify a loan, equity or no equity, the loan may be modified.
Equity is the amount of money that remains when the amount of money remaining on a loan is subtracted from the value of the property. If the resulting number is a positive number, then the home has equity equal to the result. If the resulting number is negative, then the home is said to have no equity.
In most cases, a lender will not use the presence of equity to determine a person’s eligibility for a loan modification. A person’s eligibility for a loan modification is dependent on the person’s ability to make their payments and the presence of any hardship the borrower is experiencing. Under President Obama’s Home Affordable Modification Plan (HAMP), the amount of equity that a person has in their home is not one of the pre-application requirements that the borrower must meet in order to apply for assistance.
If the borrower with equity in their home is considering a loan modification but is told by their lender that they are ineligible to apply for assistance because of the equity that is present in the home, the borrower should contact a foreclosure attorney immediately. The equity in a home will not prevent the lender from initiating a foreclosure against the borrower if the borrower becomes unable to make their minimum monthly payments.
Those with equity in their home may be tempted to take out a loan against their equity, but this is not recommended for the borrower facing a financial hardship. One of the worst things that a borrower facing a financial hardship can do is take out more loans. A home equity loan is usually used by people to make repairs in their home in order to increase the home’s property value; it should not be used by people just to make their loan payments on time. Beginning a pattern of using more loans to pay off existing loans is one of the fastest ways for a borrower to be drawn deeper and deeper into debt.
A wise borrower will seek a more permanent solution that does not add to their burden of existing debt. A loan modification is almost always a person’s best option because it allows the borrower to make lower monthly payments on their existing loan. No new loans are started and no interest is added to the loan principal. Depending on how the lender will approach the modification, the borrower’s interest rate may be lowered and/or the borrower may have certain late fees forgiven. These tactics are all done in an effort to help the borrower get out of debt, so adding more debt to the equation would be a contradiction and it would be unwise for the lender. Any lender willing to let a struggling borrower borrow more money is just asking for trouble.
Borrowers should hire an attorney to apply for the loan modification on their behalf since it will be easier for an attorney to negotiate better modification terms than a borrower. Even if the attorney is unsuccessful at negotiating terms that both parties can agree to, the attorney will be able to represent the borrower in court if the case goes to litigation and will also be able to guide the borrower through their other options to avoid foreclosure if litigation doesn’t work, like a deed in lieu of foreclosure or a short sale.