Unlike a mortgage loan refinance, a loan modification changes the original terms of your mortgage loan. This typically involves lowering your interest rate or changing the term of your loan.
To qualify, you usually need to demonstrate financial hardship. This could include losing your job or suffering from a long-term illness.
Lower Payments
A loan modification changes the original terms of your mortgage loan by either extending the term, lowering your monthly payments or changing the type of loan. This can save you money and allow you to keep your home.
Lenders are not obligated to offer loan modifications, but they do so because they want to avoid foreclosure. Foreclosure costs them the amount they loaned you plus interest. Loan modifications reduce that loss and keep them from having to sell your property and make a huge profit.
To qualify for a loan modification, you will need to provide information about your financial situation, including income and expenses and a hardship letter that details your circumstances. This can be complicated and time consuming, but an experienced attorney can help you understand your options and prepare all required documentation. A principal forbearance option can help lower your payment by adding on some of the outstanding debt to the end of the loan.
No Impact on Credit Score
The impact of loan modifications on a person’s credit score can vary. It depends on how your lender reports the modification to the credit bureaus and your credit history.
If your mortgage lender reports your loan modification as a new debt on your credit report, this will negatively affect your credit scores. However, most loan modifications do not result in a new debt but rather change the terms of an existing one. Therefore, your credit score should not be significantly impacted by a loan modification unless the original debt was missed before your lender lowered your payment.
Beware of programs that call themselves loan modifications but don’t present rigorous qualification guidelines as these may actually be debt settlement arrangements that hurt your credit. Also, if your loan modification involves allowing you to skip payments, this will be reported as delinquent to the credit bureaus and can have a negative effect on your credit scores. However, if you make your modified payments on time you should see a gradual improvement in your credit scores.
No Foreclosure Risk
If you have been unable to keep up with your mortgage payments, but you expect your circumstances to improve and can resume your regular payments, loan modification is an option. A loan modification allows you to keep your home and avoid foreclosure, which has a devastating effect on a person’s credit.
A loan modification may reduce your interest rate or extend the repayment term to lower your monthly payment. It also may include forbearance of part or all of the principal balance and change the type of loan from an adjustable to a fixed-rate mortgage.
To qualify for a loan modification, you must demonstrate financial hardship and meet the criteria set by your lender and investor. For example, you must have a history of making on-time payments for the past year and not have already completed a trial payment plan. If you haven’t been able to make mortgage payments, you must submit a letter of hardship that includes a summary of your financial situation and an estimate of how much your future income will be.
Timely Process
While loan modifications can help borrowers save their homes, they can be a complicated and time-consuming process. They also can affect your credit score and may result in paying extra interest over time. For this reason, they are typically only available for homeowners who can’t afford full mortgage payments and aren’t qualified for refinancing.
Loan modification can include lowering your interest rate, extending your repayment term or even reducing the principal amount you owe on your loan. A reduction in principal, however, can have tax implications.
Getting a loan modification requires a thorough application and documentation of your financial hardship. Depending on your lender or program, you might need to write a “letter of hardship.” This document should clearly explain the circumstances that made you fall behind in your payments or will make it likely that you will not be able to catch up. It should also detail your plan for regaining stability and your ability to pay going forward.
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