A loan modification refers to a change that is made to the existing terms of a loan. These changes are typically made because the borrower cannot repay the original cost of the loan.
There are a few ways that the loan can be modified. The repayment period may either be extended or the interest rates may be reduced. Alternatively, a different type of loan may be offered to the borrower. In some cases, the borrower may be offered a combination of each of these options.
There are certain situations where the lender may consider a loan modification. It is worth noting that there are some instances where your request will not be accepted.
The majority of successful loan modifications are negotiated by either a settlement company or an attorney. Moreover, a modification may either be agreed on during a settlement procedure or if there is a risk of a foreclosure occurring.
Qualifying For A Loan Modification
Certain eligibility requirements must be met for individuals to qualify for a loan modification. First and foremost, you must be able to prove that you are in a state of financial hardship.
This may be caused by a loss of a job, an illness or a death of a family member, a divorce, a disaster of some kind (e.g one that is natural or declared), or an unexpected increase in house costs.
For your request to be successful you must be able to show that the situation that you are in is going to last for a considerable length of time.
Furthermore, you must also ensure that you do not have any cash assets or savings that you were intending to use to make your mortgage repayments.
Secondly, you must be able to show that you are either behind on one of your regular mortgage payments or that you are likely to miss an upcoming payment.
If the lender believes that there is a way for you to meet your payments regardless of the financial difficulties that you may be in, it is highly unlikely that your application is going to be successful.
Simply put, the lender will assume that you are capable of making your repayments if that is what you are currently doing. Moreover, you should also make sure that the money that you do have is being spent wisely.
If you are failing to make your mortgage repayments but you are splashing out on other luxuries, you will have to make some changes to your spending habits before the lender will consider approving you.
The next requirement concerns your property. You must be able to show that the property which you are currently living in is the place where you usually live.
Some lenders will be more flexible than others so you will need to check this factor beforehand. If you do not live at the property, it is unlikely that you will be able to receive a modification.
Depending on the scale of the potential loss, there are some lenders that will approve a loan modification on a second property.
Finally, you must be able to prove to the lender that you are able to keep on track with the modified repayment schedule.
If you cannot show that you are going to make the repayments on the new schedule it is highly unlikely that the lenders are going to approve the modification as there is no guarantee that they are going to get their money back.
You need to be able to show proof of your income, even if it is not income that you have earned yourself but have instead received from a secondary source.
Depending on the lender, you may need to complete a trial period which will show them whether or not you can afford the modified repayments.
Applying For A Loan Modification
Now that you know whether or not you are eligible for a loan modification, you may be wondering how you can go about applying for one.
If you have already missed a payment or you are anticipating that you are not going to be able to make an imminent payment, first you will need to make the lender aware of your financial situation.
It is more than likely that you will need to provide them with proof of your financial hardship as well as being able to provide them with lots of information and detail about your situation.
It is important to check with your lender or servicer about the documentation that they need as part of your application for the modification of your loan. This is because each lender/ program is going to have qualifications that need to be met.
In most cases, they are likely to require the following: information about yourself, your property, and your mortgage.
You will also need to show them your bank statement along with your tax returns and a pay stub. Furthermore, you will also need to provide them with a hardship statement.
If the lender approves your application for the loan modification they will then offer you a new loan repayment amount.
Alternatives To A Loan Modification
There may be some people who do not qualify for a loan modification. As such, they may now be wondering what alternative options are available.
It is worth consulting the lender to see if they have any other programs available that may be better suited to your and your financial situation.
For example, they may have a repayment plan that they can offer you or refining options. Should you opt for the latter you will be able to refinance your mortgage so that the payments that you make are more affordable.
There are a few criteria that need to be met for individuals to qualify for a loan modification. Essentially, you must be able to prove to the lender that you are experiencing financial difficulties which are going to affect your abilities to make the repayments on your existing loan.