Why You Shouldn’t Do A Loan Modification If You Have No Equity

A lot of people think loan modifications sound like the perfect answer when they’re facing Financial hardships. Heck, some people even try to get a loan modification when they can afford their mortgage payments. People also seem to think it’s a good idea to get a loan modification when you have no equity in the home. We’re going to look at some reasons why you may want to reconsider your options when you’re upside down or just afloat.

Loan Modifications Are Not The End-All To Be All.

There are a lot of misconceptions surrounding loan modifications. People look to loan modifications as a solution to most of their financial problems. For example, someone who runs into a financial situation and can’t afford to make their mortgage payments may think a loan modification will always reduce their monthly payment. While this can be true in some instances,  people don’t understand loan modifications don’t often work out that way and are designed only to help somebody facing Financial hardships.

Loan Mods Come At A Trade-Off.

When you go to the bank and negotiate a loan modification application, there is a lot involved. Loan modifications only make sense under certain circumstances when somebody’s facing a genuine hardship. There are also many issues with loan modifications, but people don’t realize it. For example, the process can take a long time while dealing with the bank. It’s very common the bank will lose paperwork or not take your claim seriously. Loan mods are set up in a way where the bank or lender does not lose money. In fact, you will likely pay more money in the end and potentially stall the equity you’ve worked so hard to develop.

 Loan Modifications And Equity.

One of the more prominent problems with loan modifications, even if you are approved, affect your equity. For instance, the reduced amount you’d likely experience off your monthly payment will add on to the back end of the mortgage. This means a temporary modification will penalize you towards building equity in your home. Going through the process could make sense if you run into a situation where you can’t pay your mortgage payment, and you have a lot of equity in your home.  However, if you’ve recently purchased, and you don’t have equity, a loan modification does not make sense.

The Sweet Spot And Loan Modifications.

Knowing how much Equity you have in your home is vitally important if you’re considering a loan modification. Banks will calculate the odds to what works the best for the bank.  They will follow federal guidelines while doing these calculations but they do have a bit of freedom to work with their internal policies also.  Having too much equity in your home while considering a loan modification could be risky, a bank could decide to go right to foreclosure. Remember, they’re in the business of making money and depending on the circumstances they may push for foreclosure. On the other hand, when you do not have any equity, a loan modification is not a good idea at all. When you’re thinking long-term battling to keep a home you have no equity in, you can have access to far better options. The restrictions are too confining, and in most cases, the benefits don’t always outweigh the risks.

A final word, loan modifications are not always the best solution because the risks don’t outweigh the rewards. Loan modifications come at an expensive trade-off, people don’t realize you are sacrificing equity along with paying more money. It is vital to know how much Equity you have in your home before you consider a loan modification. Be sure to explore all your options because jumping over the dollars to get to the nickels doesn’t always make a lot of sense.


Ian Manta is a successful business owner and lifetime investor in real estate. He has purchased numerous investment properties to grow assets, and develop passive income.