A loan modification is where the lender agrees to modify the terms of their loan to the borrower. It can be a short term modification or it can be for the entire term of the loan. The lender can adjust the interest on the loan, forgive past due payments or penalties, reduce principal or the amortization period.
How Do I Apply for a Loan Modification?
The borrower or someone on their behalf must contact the lender to start the process. The lender will require you to send them various financial documents and a hardship letter explaining why you need a loan modification. You must provide the lender with all of the information and documentation that they require or you will not obtain the loan modification. You can attempt to obtain the loan modification on your own, hire someone to do it for you or use a free service. You should be very careful who you hire to negotiate a loan modification. Make sure that the company negotiating the loan modification is local. Many loan modification companies are not local, charge outrageous fees, and have no accountability because they are not local.
What Will Lenders Modify?
To date, lenders are not reducing the principal amount owed so if you get a loan modification your property will still be upside down if you owe more than the property is worth. Lenders are more likely to reduce the interest rate, give you a fixed interest rate instead of an adusable interest rate or amortize the loan over a longer period of time (this will lower the monthly payment).
When Will Lenders Agree to Modify a Loan?
The lender will not agree to a loan modification if you do not have the income to pay the modified loan payment. The lender will not agree to the loan modification if your income is sufficient to make the current monthly loan payment. In other words, you can't make too much or too little or the lender will not agree to the loan modification.
Is a Loan Modification in Your Best Interest?
The borrower must also determine if a loan modification is in their best interests. If the borrowers property is upside down a loan modification will not solve that problem unless the lender agrees to lower the amount owed which is very unlikely. If the borrower is underwater they must be prepared to stay in the property until the values rise enough to wipe out the deficiency. Given the tremendous drop in property values many owners are going to be trapped in their homes for a long period of time. A job relocation, a divorce, or many other factors may force a move and if that move is before the values rise enough to wipe out the deficiency, the borrower is still going to have to go through a short sale or foreclosure and suffer another hit to their credit.
A Loan Modifications Credit Impact
A loan modification is generally not a way to avoid credit problems. A loan modification can lower your credit rating up to 200 points.