When getting a loan, there are several different things to look out. Although it is always a good idea to take into account any changes that might occur during the term of your loan, you can never be quite prepared for everything.
When there are certain changes that need to be made, loan modification comes into play.
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What is Loan Modification?
Loan modification is when a change is made to the terms of an already existing loan. This change is made by the lender and may involve a reduction in the interest rate, extension of the length of repayment time, a different type of loan or even a combination of any three.
The loan modification process usually begins when the borrower is unable to pay the original loan. In order to have a successful loan modification process, the help of an attorney or a settlement company is used to help negotiate. Some loan modifications may even make borrowers eligible for government assistance.
Loan modification is made to assist with any type of loan. However, they are most commonly used with secured loans such as mortgages.
Your chances of getting a loan modification depend on a lender agreeing to it during a settlement procedure or if you are facing a potential foreclosure. In situations like such, the lender decides that a loan modification will be less costly to the business than going for a foreclosure or a charge-off of the debt.
It is not uncommon to confuse a loan modification agreement with a forbearance agreement. However, they are not the same. A forbearance agreement only provides short-term relief to a borrower that has a temporary financial problem whereas a loan modification agreement is more of a long-term solution.
There are two ways you can get professional assistance when negotiating a loan modification:
- Through settlement companies that work on behalf of borrowers and settle with their creditors to reduce debt.
- With the help of mortgage modification lawyers that specialize in negotiating for the borrowers that have been in default and threatened with foreclosure.
Who Qualifies for a Loan Modification?
Although loan modification is for individuals struggling to make their mortgage payment, it does not apply to everyone. For loan modification, homeowners must either be delinquent or about to face default. This means they are not delinquent yet but there is a high chance they will be.
Reasons for the default can include the loss of a job, spouse’s death, a disability or an illness that has restricted you from repaying your mortgage on the original loan terms.
How to Get a Mortgage Modification?
You should always start with finding out more information about anything you want to do. You can either make a phone call to your lender or lodge an online inquiry. You should honestly tell them why making mortgage payments might be hard for you right now and then inform your lender about your proposed adjustment to the mortgage.
Lenders will require you to submit a loss mitigation application and any details about your finances so that they can evaluate your request. Some lenders will also require you to be delinquent with your mortgage payments usually up to 60 days.
You should be prepared to provide the following information to your lenders:
- A hardship letter which will explain what affected your ability to make your current mortgage payments and how you are planning to rectify the situation. This should also be supported on your other documentation.
- IRS Form 4506-T which is a form that allows the lender to access your tax information themselves from the Internal Revenue Service (IRS) if you fail to supply it yourself.
This application process can take hours. You will be required to submit everything along with all information and forms in the format that your lender requires. If you miss something your lender has asked for or if it is outdated, your application might be pushed aside or rejected.
Different lenders tend to have different criterias for approving any loan modification requests which means you will not know whether you qualify or not unless you ask. The lender would be required to respond to your application within 30 days of receiving it. You should keep in contact with your lender during this time in case they have any questions.
What Happens After a Loan Modification is Approved?
There are several issues to be considered once you have been approved for loan modification.
You will be required to calculate how much interest rate reduction you would need after your initial eligibility screening. You can use a loan modification calculator to do so. This interest rate will be needed to bring the Fannie/Freddie mortgage or conventional loan payments within 31% of your gross income per month. If the interest rate reduction is not enough to decrease your payments, your lender will have the option of extending your mortgage to 40 years. This will lower the amount you owe each month along with a reduction in the interest rates. Your lender can also choose to defer payment on a portion of your mortgage. This is known as “principal forbearance” in the lending industry. In some cases, the lender may end up forgiving a portion of your mortgage.
Once you have been approved for loan modification, you may be required to run a “value test” to show whether homeowner relief might be less costly for the investor than not modifying the loan, according to the Home Affordable website. If your income is too low compared to the value of the home or you have a lot of equity in your home, you may not be approved for the loan modification. But you will not know for sure until the figures are calculated. For homeowners who do qualify for loan modification, you will have a three-month trial period in which you will get a modified home loan payment for 90 days with a new payment level and interest rate.
Before being approved for a permanent loan modification agreement, you will be required to make all payments on time during the trial period. If you miss any payments or make late payments, you will lose your eligibility to get an Obama mortgage.
You should be clear about your responsibilities when applying for a loan modification. Borrowers who do not pay on time or do not pay at all during the 90 day trial period are usually considered a bad risk and are likely to be denied permanent loan modification.
Borrowers will be required to sign a statement that would indicate that all information provided in order to qualify for loan modification is true. If you are misrepresenting your finances, employment situation or financial hardships, you may be liable to face serious consequences as per the loan modification rules and regulations.
However, one thing you should know before you modify is the potential downside of loan modification. It is likely to be added to your credit report, negatively impacting your credit score. Of course, the credit dip will not be as negative as a foreclosure would be but it could end up affecting your ability to qualify for other loans for a long time.
If your loan modification is only temporary, you may need to return to original terms of the mortgage after the term ends. You will also be required to repay the deferred amount before you can qualify for a new purchase or refinance loan. Lenders also may require a record of 12 or even 24 on-time payments after permanent modifications that would help them in determining whether you are able to repay a new loan.
You should be aware that your mortgage term could be extended depending on the modifications done on your loan. It might take longer to pay off your loan including the additional interest you would have to pay.
So to answer the question that is frequently asked by individuals, “how many loan modifications are you allowed?”, even though it depends on your lender and the type of mortgage loan you have, it would not be advisable to have more than one loan modification as it will only reflect badly on your credit reports and leave a negative mark on your credit history, making you an undesirable borrower for lenders in the future.
But if you are a homeowner on the brink of losing your home, the benefits of a loan modification can outweigh the potential credit risks and extra interest for you.
So now that you know what happens after a loan modification is approved, you can make sure you prepare for it accordingly. You should be prepared to be honest about your financial struggles with your lender and have all the information ready that they require.
Being approved for loan modification can help you with reduced monthly payments and a reduction in the interest rates which can prove to be quite beneficial if your financial situation is not good. However, in order to be approved, the most important thing is to do what your lender asks you to or you might be rejected from a loan modification and if you default on your mortgage payments, can even end up losing your home.