If you've recently run into a financial hardship it can be stressful and a life-changing experience. If this hardship is affecting your payments for your home and you are now behind on your mortgage, there are options available. You may be familiar with some terms such as bankruptcy, short sales, foreclosures, and even loan modifications. Each can have an impact on your credit score. Knowing which option to pursue is not always easy. Different sets of variables make every situation unique. For instance, if you're looking at a loan modification and have no equity in your home, there are reasons why you shouldn't pursue it. Let's quickly cover a scenario that supports this reasoning.
Loan Modifications Are Not Complete Solutions
A loan modification is designed to provide you temporary relief. Banks are in the industry of making money. If you've run into situations where you cannot pay your mortgage payment, a loan modification may sound like an attractive option for you. However, the bank has to follow federal guidelines and will work with mathematical formulas. Despite this, the bank will not position themselves to lose money after you have signed an agreement with them concerning the initial mortgage. In fact, the bank will even deny the loan mod if they feel foreclosure is a more profitable option for them. One major factor influencing the decision can be how much equity you have in the property.
Loan Mods Come At A Steep Price
Payments for a loan modification will almost always be set up for a temporary time frame. The burden will be on you to prove you can handle the payment structure outlined in the modification. For example, if you were making a specific salary for a position in your workplace and it changed temporarily. You must prove it will return to a regular wage by a particular date in the future. You will then need to catch up eventually. Loan mods can work in some distinct instances but, they shouldn't be your only go to strategy. The bank will always come out on top of the situation.
In many instances, the amount owing is just merely delayed and is added to back end of the loan. This process is essential to understand because it will affect your equity. It will not be ideal for your credit score either. We all know and understand equity and why we mortgaged our home in the first place. If we are struggling to get through a terrible situation, there are likely other options. You want to be a long-term thinker, especially during difficult times.
No Equity And Loan Mods
There is a sweet spot with the amount of equity in your home and using a loan mod to get you out of a sticky place. It might be a bit tricky. If you have a lot of equity, the bank may determine you have enough to cover the deferred interest and the cost of foreclosure. In a case like this, the bank will go in the direction of foreclosure because it is the lower cost solution. Not having equity in the property is bad too because a loan mod will delay any chance of developing equity in the home. You'll carry the burdens of having a stressful situation, plus, attempting to make all the payments while being in a position similar to renting. Selling and then renting will be a better option in these situations.
To conclude, the amount of equity in a property while considering a loan modification is an extraordinary variable because having too much or too little can work against you. Banks design loan mods for relief from temporary situations. You will delay building equity in your investment using a loan mod, so it's simpler to rent if you have no equity.