Loan Modification Primer

What is a Loan Modification? The technical answer is the amendment of the loan to re-amortize or alter the schedule of payments for the remaining balance and/or extend the current term of the loan in order to reduce the monthly payment, the interest rate and/or loan balance allowing the borrower to keep their home.

Today's Economy ? Because of the current economy, many families can no longer afford their homes and are losing them to foreclosure. The foreclosure rate in many states is reaching record numbers. The more foreclosures there are, the more downward pressure is put on home values. When there is a declining real estate market, mortgage lenders lose money. In many cases they can lose thousands of dollars on each home they have to take back in foreclosure. When the number of foreclosures is at a record number, it is easy to see why there are many banks going out of business.

The Feds ? The Federal Government has made many announcements recently about how they will help homeowners in an effort to slow down the foreclosure rate. It seems as though the more announcements they make and the more bail out bills they pass, homeowners get more confused. I receive calls every week from homeowners that are so confused with their options that they think the best option is to just walk away from their home and do nothing.

Options ? Foreclosure, Short Sale, or Loan Modification are the main options available to homeowners today that are unable to make their house payments. Foreclosure and Short Sale will have a dramatically negative impact on a credit score. A loan modification will not have a negative impact on a credit score. In addition to being the best option to preserve credit scores, Loan Modifications will help stabilize real estate values.

Mortgage Lenders ? Contrary to many beliefs, lenders do not want to take homes back in foreclosure. They want to work with the homeowner to see if there is a viable option to help them keep their home. They are willing to reduce interest rates, extend the term of the loan and in many cases forgive any past due payments in order to help the homeowner make their home loan payment fit their current circumstance.

Hardship ? The key to a loan modification is having a financial hardship. Hardships come with many different faces. There are two different types of financial hardships. One type is a reduction in income. The other type of hardship is an increase in monthly expenses. It doesn?t matter which type of financial hardship the homeowner may have, both are considered acceptable by most lenders.

Examples ? Here are a few examples of a financial hardship: A homeowner might have a reduction in pay because of a divorce, lay-off, reduction in commission or an illness. A homeowner who was out of work for any length of time and had to live on charge cards for a while, causing an increase in their monthly payments can also be an acceptable hardship to many lenders. A homeowner may simply have an adjustable rate mortgage that will be adjusting to a payment they can no longer afford.

Loan Modification or Short Sale ? Did you know that less than 10% of homes listed for sale as a short sale are actually sold? The rest of the homes go to foreclosure. Even if a homeowner is fortunate enough to sell their home on a short sale, it could have a devastating impact on their credit score. A Loan Modification does not have the same negative impact on credit scores. A short sale can cause home values to drop because the home is being sold for less than what is owed to the bank. When a loan is modified the value of the home is not reduced, only the monthly payment is reduced. As more people start to modify their loan instead of short selling, home values will begin to stabilize.

The Right Answer- There are many different options available today. Contact a professional to discuss which option is the best for you.

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What Makes Up Your Credit Score

Ever wonders what happens when a potential lender requests your credit score? First, they send a request to a credit bureau, and they receive a report. This report will include:
* Your name * Your Social Security number * Your address (and any previous addresses) * Your current and past loan information * Your public record information (court judgments, bankruptcies, liens) * A list of other companies who have reviewed your credit. * Your 3 digit credit score

While some of this information is self explanatory, some of the other aspects, especially your credit score, are a bit of a mystery to most consumers. Few people know their credit score or understand how it is calculated. Additionally, most people are unclear about how their behavior can affect their scores.

The majority of people understand the basics, like failing to make a payment will make your score go down, but there are a number of complexities that trip up the average consumer. If you pay your debts on time, don?t carry too much debt on any one card, don?t close older accounts unless absolutely necessary and only apply for new credit when you have to you will generally be in good shape. However, it is important to keep yourself informed so you can maintain a credit score that accurately reflects your consumer status.

Your credit score is determined by an algorithm developed by the Fair Issue Corporation (hence its other name of FICO score). Since its inception, three corporations, called ?credit bureaus? specialize in collecting and reporting on financial histories. Those three companies are Equifax, Experian and TransUnion. While, the exact formula used to calculate your credit score is a tightly guarded industry secret, these companies provide general guidelines about financial behavior that can affect your credit score. When calculating your score, the basic formula includes:

35 percent: History of on-time or late payments of credit.

30 percent: Available credit on your open Credit Cards

15 percent: The age of your lines of credit (old = good)

10 percent: How often you apply for new credit.

10 percent: Variable factors, such as the types of open credit lines you have

Lenders use your credit report in order to judge your reliability as a loan candidate. Your credit report indicates your ability to handle debt responsibly and will help banks decide if you are a desirable loan customer. A high credit score can help you lock in low APR rates or secure special deals on loans. A bad credit report may prevent you from securing loans and can damage your ability to buy a car, open a credit card or rent a home. A history of inability to manage your credit successfully will make lenders uncomfortable about trusting you with additional funds in the future.

You are entitled to a free copy of your credit report once a year, an offer you should take advantage of. When you do receive your credit report, check to ensure the figures are accurate and act quickly correct any mistakes. This may include any clerical errors, identity theft issues or incorrect information. If your credit score is low, you should begin working on a financial rehabilitation plan, either on your own or with a certified debt councilor, to begin correcting your bad debt habits.

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