A loan modification means revising the original conditions of your mortgage loan. This is requested from and negotiated with your current lender, so you must reach an agreement with them on the new terms of your loan. A loan modification helps you avert default and maintain possession of your house, even in financial hardship.
Because a loan modification is an alteration of loan terms, it does not replace the original loan. The objective is to make the loan more manageable to pay off in times of financial strain to ensure that you can continue to pay off the debt. This can be done by lowering the interest rate or adjusting the repayment period to make the monthly payments more affordable. The loan can also be modified by transitioning to a fixed-rate mortgage and adding the late fees into the principal.
There are circumstances when a loan modification may be the best option for you, such as:
These are the ways that a loan modification can help you through financial crises.
If you’re having difficulty meeting your monthly payments, the lender may be willing to adjust your term. Extending the repayment period can help reduce the cost you must pay back every month.
If interest rates have decreased since you locked in your loan, your lender may accommodate a request to adjust your interest rate to match the current one.
If you have a fixed income and require a predictable monthly bill, the lender might consider transitioning your loan from an adjustable interest to a fixed rate.
This is a rare accommodation that only occurs when there are no other solutions to avoid foreclosure. Setting aside some of the principal balance to be paid later can help decrease monthly payments and make the mortgage more manageable.
While loan modification is the right option for certain financial circumstances, it’s not a one-size-fits-all type of solution for everyone struggling to meet their mortgage payments. Typically, those who qualify for loan modification are either delinquent or at risk of imminent default due to factors that can permanently impact your ability to pay off the loan.
Application requirements may vary between lenders, but below are some standard documents mandated by most. The key thing is to prove to the lender that you will be permanently unable to repay your loan under the current terms.
This functions like a cover letter that explains why you need to have the loan terms modified. It expounds on the reasons why it’s impossible to meet your monthly payments or your entire loan balance. You may also consider attaching supplementary documents that will reinforce the authenticity of your situation, such as a termination of employment letter or medical bills.
This serves as proof that your earnings are insufficient to cover the monthly payments of your loan. This can be a contract or salary agreement from your employer that explicitly cites your hourly or yearly income. If you are self-employed, the lender may require you to submit a profit and loss balance sheet.
Some lenders require you to submit tax returns from the last two years, while others may only ask for the most recent one.
Like the proof of income, this serves as proof that all other assets are insufficient to pay off the monthly dues.
Note that a loan modification can impact your credit score, so if you are not yet delinquent or facing impending default, it may be beneficial to review your options.
Refinancing is one of the commonly known options to make debt payments more manageable, but it’s significantly different from a loan modification. To avoid confusing the two, these are the differences between a loan modification and refinancing:
This entails changing the conditions of your existing loan. It makes the monthly payments more manageable and affordable by adjusting the payment terms, adjusting the interest rate, or adding in the missed payments back in the loan.
This option is typically reserved for those who can no longer apply for refinancing as they cannot qualify for a new loan.
Refinancing entails replacing your current loan with a new one with more favorable terms. It reduces the monthly payments due to the lower interest rate or longer payment period of the new loan.
Keep in mind that one option is not better than the other. Rather, these options are designed for different types of mortgage payers experiencing different levels of financial strain. Each type has its pros and cons, but the appropriate option for you will depend on your unique circumstance.
Should you need help in navigating load modifications, contact us for more information.