Homeowners trying to decide whether to try for a loan modification or file Chapter 13 are often informed that loan modifications are only available for borrowers who have fallen behind in their payments. The problem is that skipping mortgage payments in order to qualify for a loan modification program is almost a sure way to lose your home.
Here’s why:
The track record of loan modification programs is abysmal. Months go by while a loan modification application is “under review”. Borrowers consistently report that lenders repeatedly lose paperwork and ask for it over and over again. In the end, few loan modification requests are granted.
If the modification is granted, lenders often have added so much in interest and penalties that the outstanding balance of the “modified” loan has grown to the point that it would be impossible to pay, even if written at reduced interest rates over an extended term.
If the modification request is denied, the likelihood of the homeowner being able to catch up are slim indeed. Even if the lender has not piled on the intervening interest and penalties, few families in financial distress will have been able to set aside their monthly payments so that they can pay up on the arrearage. Furthermore, if you are behind even one month, the lender may choose to refuse payment and proceed with foreclosure.
If the arrearage has not grown too large while the modification application was pending, the house may still be saved by filing under Chapter 13 and paying off the arrearage over the five year course of the plan. However, if the accumulated arrearage has become too large, the required payments may be too high for the plan to be workable.