What Happens After A Loan Modification Is Approved?

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.

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:

1. Through settlement companies that work on behalf of borrowers and settle with their creditors to reduce debt.
2. 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. Also, 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:

1. Income.
2. Expenses.
3. Documents.
4. 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.
5. 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 Approval of a Loan Modification?

Upon approval of a loan modification, you must determine the necessary interest rate reduction using a modification calculator to align mortgage payments with 31% of your gross income. If this reduction isn’t sufficient, your lender may extend the mortgage term to 40 years or defer a portion of the mortgage through principal forbearance. In some cases, the lender might forgive a portion of the mortgage.

Following approval, a “value test” assesses if homeowner relief is economically feasible for the investor. If your income is too low or if you possess substantial home equity, approval may be denied. However, confirmation occurs only after calculations. Successful applicants undergo a three-month trial period with adjusted payments and interest rates.

During this trial, punctual payments are crucial. Failure to adhere to the payment schedule jeopardizes eligibility for the loan modification. Signing a statement confirming the veracity of provided information is mandatory. Misrepresentation can lead to severe consequences under modification regulations.

It’s essential to understand potential downsides, such as credit score impact. Though less severe than foreclosure, a modification can still hinder future loan qualification. Temporary modifications may revert to original terms post-trial, and deferred amounts must be repaid.

Furthermore, modification can extend the mortgage term, increasing overall interest payments. While the number of allowable modifications varies, multiple instances reflect poorly on credit reports, deterring future lenders.

Despite risks, for homeowners facing foreclosure, the benefits often outweigh potential drawbacks.

Conclusion

Understanding the journey post-approval of a loan modification empowers you to navigate it effectively. Honesty about your financial struggles and readiness with all required information are vital when communicating with your lender.

Securing approval for a loan modification yields reduced monthly payments and lower interest rates, proving highly advantageous for those facing financial strain. Compliance with your lender’s requests is paramount for approval; failure to do so may lead to rejection, or worse, foreclosure.

Prepare to engage with your lender transparently, ensuring all necessary documentation is at hand. By adhering to their guidelines diligently, you position yourself for a successful loan modification process, safeguarding your home and financial stability.