Understanding Loan Modifications

What is a Loan Modification?
A home loan modification means changing the terms of your mortgage, making your payments more affordable, and preventing yourself from going into foreclosure. In order to do this, lenders can reduce the interest rate on your mortgage, stretch out your loan period, lower your principal balance, or use some combination of these methods.

Who Qualifies?
There are no set guidelines to determine who is a good candidate for a loan modification. In the end, the lender makes the decision whether or not to modify your mortgage based on what is in his or her best interest, and that can mean either keeping you in the loan or taking the house back through foreclosure. Still, there are some general rules about when a modification is feasible.  A lender will usually look for these factors:

• The property is in good condition.
• You have had the loan for more than a year and have missed or been late on at least three months of payments (You may still be able to qualify even if you are not yet delinquent on your payments).
• Your financial situation has taken a turn for the worse, but you still have some stable income to pay the modified mortgage terms.
  

What Steps Do I Need to Take?
In order to initiate the loan modification process, you need to contact your lender. Several things will be required of you. You will need to write a letter (roughly two pages) describing your financial hardship. This can often be the most persuasive way to convince your lender you need a modification.

The lender will typically have lots of paperwork for you to fill out once he or she is aware of your situation. This will require providing detailed information about your income and expenses. You need to be able to show with raw numbers how you are no longer able to afford your current payments. You should gather items like your W-2 and other tax forms, pay stubs, and bank statements. If the lender approves your request, your mortgage payments will be put on hold for up to 60 days while your new home loan terms are finalized and put into a contract.

Foreclosure can be a very costly and labor-intensive process for lenders and in many cases they will decide it is most cost-effective to modify your loan. Just remember there are no guarantees – your lender is not legally bound to help keep you out of foreclosure. It’s up to you to make a strong case for a loan modification.