Loan Modification: All You Need to Know

23 August 2016
 Categories: Law, Blog


A loan modification can be defined as a permanent change in the terms of a borrower's loan. It also allows the loan to be reinstated and provides the borrower with a more affordable payment. This is an option for those who have trouble making their regular mortgage payment after falling on difficult financial times and are trying to avoid bankruptcy. A loan modification allows the homeowner to remain in the house even if changes are made to the original terms of the loan. Examples of modifications include changes to the interest rate or extensions of the time allowed for repayment. Most loan-modification programs are through the federal government, but some financial institutions offer their own programs.

Benefits of Loan Modification

There are some benefits to having your home loan modified.

     —You can reduce your home loan to a rate that is more affordable.

     —You can resolve your delinquency status with your mortgage lender.

     —It is less damaging on your credit than a foreclosure.

     —You can stay in your home during the process.

Getting Started

1. Gather your information. You will need all of your loan information on hand when applying for a loan modification. You will need your mortgage statements and your second mortgage statements, if applicable. You will also need to gather your other debt-payment information, such as credit cards, student loans, and unsecured debt. Also, you will need to provide your income information, such as pay-check stubs and tax returns.

2. Prepare to outline your hardship. You will need to explain your current financial situation that makes it difficult for you to pay your mortgage. The mortgage company will need to fully understand why you are having trouble so that they can find the best solution.

3. Get in touch with your lender and tell them you would like to apply for a modification to see if you qualify.

Types of Loan Modification

Home Affordable Modification Plan (HAMP)

The Making Home Affordable plan was implemented to help stabilize the housing market. HAMP was introduced at this time. To qualify for this plan, you have to meet certain requirements.

Borrower Requirements:

      —You must meet and verify a legitimate financial hardship that causes you to be unable to make your mortgage payments.

      —Your income is verifiably documented to support a modified loan payment.

      —You have not been convicted of crimes of felony larceny, theft, forgery, tax evasion, or money laundering in connection with a mortgage                       transaction within the last ten years.

      —Your property has not been condemned.

      —You are in imminent danger of losing your home by missing mortgage payments.

      —Your home is being foreclosed.

      —You may be eligible if you have filed for bankruptcy.

      —You must sign a loan modification agreement.

Property Requirements:

      —Your home must be a detached home, duplex, or three or four residential property.

      —You must currently occupy the property.

      —You will have to have a value test to determine whether or not a loan modification will be beneficial.

Options If You Are Denied or Do Not Qualify

If you are not able to qualify for the federal modification program, there are some additional programs that may help.

      —The Home Affordable Foreclosure Alternatives Program (HAFA) provides government assistance for a short sale.

      —Veterans Administration (VA) loans that need to be modified may find assistance with a program known as the Cal Vet Modification.

      —Federal Housing Administration (FHA) loans are an option for this form of loan.

      —Privatized loan modifications are provided through financial institutions with their own set of qualifications.

Keep in mind that a loan modification is permanent. That means if you extend the terms of your loan, you will have to pay off your loan in that time frame for the remainder of the mortgage. The interest rate you agree to in a loan modification will remain for the life of the loan.