A loan modification can be helpful if you either have lots of equity, or if you need a much lower interest rate and the lower monthly payment that can go with it. Either way, it might be what you need in order to keep your house when you are experiencing cash flow problems.
To receive a loan modification, you must convince your current lender that you need your existing mortgage contract to be permanently restructured. This is not an easy proposition, since you are effectively requesting them to alter a long-term contract so that it is less in their favor.
Still, mortgage lenders prefer having to modify your mortgage loan over foreclosure, especially in situations where your property has depreciated and you now owe more than the home is worth. Foreclosure is an expensive process, and every step costs your lender money.
That is why your lender may agree to change one or more terms of your loan and draw up a new contract based on those changes. These are some of the possible terms that can be adjusted:
- Reduced interest rates
- Conversion to a fixed interest rate
- The new loan can exceed the original principal balance if necessary
Lenders have a couple of financial incentives to modify your mortgage. First of all, if it prevents a default, they can avoid taking a possible loss on the property from a public auction sale. Secondly, the Department of Housing and Urban Development (HUD) may provide compensation to the lender as an incentive to work with you and to offset their administrative costs of modifying your loan.
If you believe that a loan modification is what you need to keep your home, you need to first determine whether you meet the requirements of a loan modification. Qualifications may include:
- You must be at least 90 days delinquent on your mortgage payments.
- Your home cannot currently be in foreclosure.
- Your current mortgage contract must be active for at least 1 year.
- You must currently live at the address.
- You must continue to maintain the property in good condition.
- You must be able to prove the circumstances that caused your delinquency (loss of income, unexpected expenses).
- You must be able to reasonably afford the terms of your modified loan contract.
If you proceed with a loan modification, you cannot pursue a partial claim. You may however find that your lender is willing to combine a special forbearance with your loan modification to allow you time to catch up on the arrears.
A loan modification is a serious process that should be managed carefully. Contacting your lender directly or going through a HUD-approved housing counseling charity are two recommended options. Paying money to a loan modification company is often a mistake, since many of these are simply mortgage rescue scams.