Loan modification options in a difficult economy

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A difficult year has left millions of Americans in limbo with limited resources, unpaid bills or job losses. Some are facing wage garnishment, foreclosure or eviction, and their options for getting out of debt are also starting to seem very limited.

Some people will consider bankruptcy when they can no longer make their monthly mortgage payments and as a way of avoiding foreclosure. While this can be a solution depending on their unique situation, it may also be possible to negotiate new terms of the mortgage with the lender, and in this way the mortgagee can avoid foreclosure and be able to keep the family home.

Loan modification basics

Known as a mortgage loan modification, this can be an optimal solution for both the lender and the mortgagee, if he can qualify. Because foreclosure is costly for the banks, they usually are open to a discussion of alternative solutions. A mortgage loan modification is different from refinancing because the terms of the existing mortgage are changed, not replaced, as would happen for a refinance.

Some possible modifications that the homeowner can discuss with the lender include extending the term of the loan, lowering the monthly principal payment, or changing from and adjustable-rate to a fixed-rate loan. Loan forbearance will also temporarily reduce mortgage payments, but they must be granted. The terms of the modification, however, remain up to the lender.

Discussing options with your lender

There are many temporary or permanent loans modification programs available through lenders and servicers. For Fannie Mae- and Freddy Mac-backed mortgages, government assistance programs like the Flex Modification program are available, as well as alternatives to the expired Home Affordable Refinance Program (HARP). It is also possible to discuss options with a HUD-approved housing counselor.

Although a mortgage loan modification can impact your credit score over the short term, building a record of consecutive payment over time or reverting to the original terms of the mortgage can help rebuild your credit.

If you are having difficulty making monthly payments, it is important to contact your lender to discuss options. If you live in Maryland or the Washington, D.C. area, if is also important to find experienced legal counsel that can help you to negotiate with your lender to so that you can keep your home.

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