There are many misconceptions of what loan modifications are. In a nutshell, a loan modification is a change in the loan terms with the lender. These changes are permanent, with the intention of a reduced payment that the homeowner can afford. Loan modifications are similar to refinances (also called refinance); however your original loan will stay with the same bank.
Not surprisingly, there are millions of people who are currently trying to get a loan modification right now. Unfortunately, most will not follow through to completion of their loan modifications. To understand the reasons why, I have spoken with many people who have tried to work with their banks and the underlying reason is that most simply do not understand what to do, how the process works or how to ask for what they want.
The investors who have loaned money to home purchasers expect a minimum rate of return and they have all of their eggs in one basket, figuratively speaking. The lenders rely on cash flow of the notes as the collateral for the home, so by lowering the interest rate or extending the terms of the loan, they may place other investments in jeopardy. Why would a bank want to do that? The banks have leveraged many other projects against the cash flow of that homeowner’s note.
Of course, these are only a couple of the factors that come into play as the note holders assess certain characteristics of the loan, such as Net Present Value of money and front end DTI. You will learn these terms in a forthcoming chapter, so stay tuned because they have vital significance concerning a loan modification.
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