A loan modification is a negotiation between a borrower and a lender that restructures home loan terms without refinancing. The original terms, conditions and rate of the mortgage are modified to meet the current financial needs of the borrower. Also called a workout plan, restructuring, or mortgage modification, a loan modification is a viable option for the many homeowners who are struggling to make their payments.
A loan modification might be the right choice for you if your monthly expenses have increased while you’ve also experienced a long-term reduction in reliable income. Consider looking into the loan modification process once you no longer earn enough income to pay off your mortgage dues.
Eligibility for a Loan Modification
You might be eligible for a loan modification if you are at least one month behind on your mortgage payments, you have a negative amortizing loan, or your loan is about to adjust. If you are upside down on your mortgage and would rather keep your property than do a short sale, you are a viable candidate for a loan modification as long as you have reliable income. Your property must be in good physical condition and cannot have already been sold at a foreclosure auction. You must live in the home as well.
Any properties bought for investment purposes or speculation will not be eligible for a loan modification. You also won’t be considered eligible if you can’t afford your mortgage payments due to job loss. Any home loans with amounts above the conforming loan limits will not be eligible either.
Preparing for a Loan Modification
Prepare for a loan modification process by gathering together your most recent income tax return, asset information, bank statements and mortgage information. You also need to provide information on the balances and minimum monthly payments due on all of your current loans and credit cards. Your lender will also need proof of the monthly gross income of your household, so supply them with copies of your last few paychecks.
Write a hardship letter that describes in detail the circumstances that caused your reduction in income or an increase in your expenses, whether it be medical problems, divorce or job loss. Keep in mind that lenders don’t like to foreclose properties if they can avoid it. As long as you can present them with the correct information and give them a realistic modification proposal, they are usually very receptive to modifying home loans.
The Benefits of Loan Modification
A loan modification is typically a win-win situation. Borrowers receive the opportunity to make reduced monthly payments and keep their homes. The lenders get their money back in a modified fashion.
Types of Loan Modifications
Although specific modifications vary according to lender, there are several basic types of loan modifications. One loan modification example is term extension, which allows you more time to repay your loan and to make lower monthly payments. Another loan modification example is the reduced interest rate program. With this type of modification, your lender will reduce the interest rate for the remainder of your mortgage. The lower interest rate automatically results in lower monthly mortgage payments. Other common loan modifications include deferring payment for at least 90 days and rolling the past due amount to the end of the loan term.
In summary, a loan modification allows borrowers to have adjustments made to their original mortgage terms. Before talking to your lender about modifying your home loan, check out a website that offers an online mortgage calculator or a mortgage comparison site. These sites work in a similar way to credit card comparison sites and could help you come up with a viable proposal to give your lender.
Posts in the Loan Modification Category
- What Is the Home Affordable Modification Program? The Home Affordable Modification Program was set up by the U.S. government to help homeowners facing foreclosure get loan modifications from their lenders. The program was supposed to prevent millions of foreclosures, but has fallen far short of that goal. Eligibility for the Home Affordable Modification Program In order to quality for HAMP, borrowers must have mortgages that were initiated no later than Jan. 1, 2009. The amount owed on the home cannot exceed $729,750 for a single-family home, and the mortgage being modified must be a first mortgage. There are also income requirements for getting a modification through the Home Affordable Modification Program. Applicants must document their income and provide an affidavit stating that they are facing financial hardship. If the total amount of the homeowner’s mortgage payment plus taxes and insurance does not exceed 31% of their income, they will not qualify for HAMP. The Home Affordable Modification Program remains in effect through the end of 2012, so if you are in need of a loan modification, there is still time to apply.