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Loan Modification: What it is and How to Qualify

By on September 24, 2011 in Mortgage

Loan Modification: What it is and How to QualifyIf you are heading toward foreclosure or into a situation where you cannot afford to pay your mortgage payments, a loan modification may be an alternative to losing your home. Loan modifications are not an option for every homeowner, but it is an option worth checking into with your current lender.

What is a Loan Modification?

A loan modification is not a refinance. In fact, a loan modification is often an option for homeowners and borrowers that would not be able to qualify for a refinance. A loan modification is a negotiation between you and your existing mortgage company, or between your attorney and your existing mortgage company. The negotiation between the two parties consists of a discussion about changing the current terms and conditions of your mortgage. The point is to create terms and conditions so that you can continue to afford to make the mortgage payments and not have to go into foreclosure proceedings.

Some of the terms and conditions that are under negotiation include:

  • Loan balance reduction
  • Lower interest rate
  • Change in term or length of the loan

Of course, if any or all of these conditions change, it lowers the monthly mortgage payment and puts the borrower in a position where they can continue to make payments and continue to live in the home.

Qualifications for Loan Modifications

Each mortgage or loan company has its own set of standards for approving or denying loan modifications. The primary reason that a lender agrees to a loan modifications is because of a major financial hardship that the borrower is going through. Qualifying for a loan modification is a different story. Typically, a lender only agrees to change the existing terms on a mortgage loan for extenuating circumstances. The extenuating circumstances the borrower is experiencing must be creating a financial hardship that is prohibiting them from being able to afford the existing loan payment.

Financial hardships that typically qualify borrowers for a loan modification usually include:

  • Significant increase in loan/mortgage interest rate (such as a change in an adjustable rate loan)
  • Loss of a job
  • Significant increase in expenses
  • Death of the primary income earner of the household
  • Major illness/disease (major medical bills/expenses)

The Modification Process

You primarily have two choices when trying to obtain a loan modification: do-it-yourself or hire an attorney to do it for you. Qualifying for a loan modification is something that you can tackle on your own. Each option has its own pros and cons. The primary advantage of maneuvering the loan modification process on your own is that it does not cost you any money. The primary disadvantage is that you have to learn the loan modification process and work through all of the steps directly with the lender.

When you work with a real estate attorney or an attorney that specializes in loan modifications, they already know the modification process. In addition, they have worked with most of the major lenders and already have contacts to work through the process faster and easier than you can on your own. The primary disadvantage is you have to pay attorney fees and costs for handling the modification on your behalf.

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