Recently on our legal forum a user asked, “My wife and I are not currently employed. We are about to lose our home. I keep reading that we might be able to renegotiate the terms of a mortgage with our lender. I think this is referred to as a loan modification. Can you tell me more about this process and what I need to do?”
What is a loan modification?
Mortgage lenders expect to be paid. If you fail to make your mortgage payments, there will come a point in time where they will contact you and tell you that they plan to foreclose on your property. One way to avoid foreclosure is to negotiate a loan modification with your lender.
Not all lenders offer loan modifications, but some lenders may believe a modification may be the best option, especially if the hardship is temporary and it will allow them to avoid foreclosure.
So, what is a loan modification? There are several ways to modify a loan. Let’s take a look at some examples.
- Extending the payment terms of the mortgage loan
One of the most popular methods for modifying a mortgage loan is to extend the payment terms of the loan. This option allows you to reduce the monthly mortgage payment without changing the principal owed or the interest rate charged.
It’s important to note that extending the payment terms can reduce the amount paid each month but will extend the life of the loan, thus increasing the cost of the loan.
- Reduce the interest rate paid for the loan.
The second option to modify the loan is an interest rate reduction. Although this is generally a temporary option, it can lower your mortgage payment for a short time and make your mortgage payments more affordable. If you would like a permanent interest rate reduction, however, you generally need to refinance your loan.
Who qualifies for a loan modification?
Modifying your loan sounds like a great option and may allow some homeowners to avoid foreclosure and stay in their home. Unfortunately, not all lenders will allow a loan modifications, and even if they do, not all borrowers qualify. So, who will qualify for a home loan modification?
- Homeowners must have consistent and sufficient income to pay the new mortgage payments.
- Homeowners must have a new proposed monthly payment which is generally 31% or less of their monthly income.
- Homeowners cannot be in the process of filing for bankruptcy protection.
- Homeowners generally have to request the modification for a primary residence.
What if I don’t qualify for a loan modification?
If you do not qualify for a loan modification all is not lost. In fact, there are several other steps you can take. First, consider finding additional employment. Next, consider selling your home. If you live in an area where property values are strong you might be able to sell the home for the what you owe on the mortgage.
Next, if all your efforts to modify the mortgage, find additional employment, limit your budget, and sell the home have failed, consider a Deed in Lieu of foreclosure. If this is not an option, you can talk to a bankruptcy lawyer about filing bankruptcy and potentially saving your home.
Latest posts by Beth (see all)
- Chapter 7 bankruptcy and why it could be a mistake - April 30, 2017
- Chapter 11 bankruptcy What do I need to know? - April 24, 2017
- Chapter 13 what if I cannot make my debt payments? - April 19, 2017