A loan modification is the permanent restructuring of a specific debt, typically a personal loan or mortgage. The process is the exact same regardless of what type of loan you’re having modified, but we’ll only refer to mortgages for the purpose of clarity and brevity.
So, why would anyone need a loan modified? The primary reason people ask for this is because they can’t afford their current repayment schedule, and the mortgage is now running the risk of becoming delinquent and then entering the foreclosure process.
In terms of what your lender can do to offer you a loan modification, this can take the form of a reduced interest rate on your mortgage, converting it from a variable rate mortgage to a fixed rate, or even extend the term of the loan, which results in lower monthly repayments, but a higher overall amount repaid. Another option is to have your mortgage arrears added to the capital of the loan itself, with new repayment terms set, often marginally higher than your previous monthly payment.
Eligibility
How do you go about being granted a loan modification by your lender? You need to prove that you’re currently experiencing provable financial hardship, to the extent that you’re unable to meet your current mortgage repayments or maintain a reasonable standard of living. Your lender will not take your word for this, so expect to be asked to furnish them with documents such as:
- Bank statements
- Proof of earnings/wage slips
- Utility bills
- Credit card statements
- Copies of finance agreements
You’ll need to give the lender a full account of your current finances, and that includes any “hidden” debts you might not have discussed with your partner or spouse. This can involve difficult conversations, but with the future of your home at risk this is no time to hide things you’re not proud of e.g. if you have an online gambling problem. Or maybe you’ve loaned money to a family member and never been repaid. Regardless of what the debts might be, you do need to be 100% transparent about what you actually owe.
It’s in your lenders interest to provide a loan modification rather than force their customers to turn instead to the New Jersey bankruptcy courts, in which case they’ll receive cents on the dollar in relation to the value of your home. Once you start defaulting on a mortgage the debt can quickly snowball from just a few hundred dollars, to a 5-figure sum in a matter of months – this is something mortgage companies are acutely aware of, and want to avoid at all costs.
Please bear in mind that your lender is looking for proof that you can’t afford to make your existing mortgage repayments based on your current income and expenditure. If, for example, they find that you could quite easily make your existing payments if you created a strict household budget, they might make that suggestion instead. Never assume that a loan modification is your right, and while most lenders are happy to accommodate these requests, not all of them will.
You can choose to deal with your lender directly, or you could also opt to take part in the government’s Home Affordable Modification Program (HAMP) program. If your lender declines your loan modification request you can engage the services of a financial counselor can make a counteroffer, with the aim of leaving you financially better off at the end of each month.
A loan modification can give you a second chance to keep your mortgage payments current, but it’s important that you fix any irresponsible spending habits you have as part of this process. Otherwise you’ll just wind up with a delinquent mortgage again in a matter of months.