How To Get a Loan Modification
Start with a phone call or online inquiry to the lender. Be honest and explain why it’s hard for you to make your mortgage payments right now. Then, let your lender know about your proposed adjustment to the mortgage. Lenders often require a loss mitigation application and details about your finances to weigh your request. Some will require that you miss a mortgage payment, often by up to 60 days. Be ready to provide:
Income: This is how much you earn and where it comes from.Expenses: This is how much you spend each month, and how much goes toward different categories, such as housing, food, and transportation.Documents: You’ll often need to provide proof of your financial situation, including pay stubs, bank statements, tax returns, and loan statements.A hardship letter: Explain what happened that affects your ability to make your current mortgage payments, and how you hope rectify the situation or how you have done so. Your other documentation should support this information.IRS Form 4506-T: This form allows the lender to access your tax information from the Internal Revenue Service (IRS) if you can’t or don’t supply it yourself.
The application process can take hours. You’ll have to fill out forms, gather information, and submit everything in the format your lender requires. Within 30 days of receiving a completed application, the lender generally must respond to your application with written notice of its offer or denial, along with the specific terms of the mortgage modification. Keep in contact with your lender during this time in case questions arise. It’s usually best to do what your bank tells you to do during this time, if at all possible. For instance, you might be instructed to continue making payments. Doing so could help you qualify for the mortgage modification. In fact, this is a requirement for approval with some lenders. Once you receive an offer for a loan modification, you’ll have to accept or deny it within the prescribed timeframe to see the changes in your loan.
Pros and Cons of Loan Modifications
Pros Explained
Reduced interest rate: A loan modification could lower your interest rate, which lowers your monthly payment and could reduce the amount of interest you pay over the life of the loan.Change in loan type: You could move from an adjustable-rate mortgage to a fixed-rate mortgage. This means your interest rate could change.Longer repayment period: Typical loan terms usually max out at 30 years. However, you could extend your repayment term, which lowers your monthly payment to something more affordable.
Cons Explained
Short-term hardship: Since loan modifications can take months to sort out, you could fall further behind on your mortgage with each month that passes. You may also incur costs, such as for an appraiser, as you work through the process.Increased interest expense: If you extend your loan terms, you could end up paying more in interest over the life of the loan.
Loan Modifications vs. Refinancing
Refinancing and loan modification might sound similar, but they’re not the same thing. A new loan might have a lower interest rate and a longer repayment period, so the result would be the same—you’d have lower payments going forward. You’ll probably have to pay application and origination fees on the new loan. You also need decent credit.
Consider Bankruptcy
If you can’t get a mortgage modification or refinance the loan, you might have one other option for keeping the property. You can file for Chapter 13 bankruptcy. This isn’t the same as a Chapter 7 bankruptcy where the court takes control of your non-exempt assets, if any, and liquidates them to pay your creditors. Chapter 13 allows you to enter into a court-approved payment plan to pay off your debts, usually for three to five years. You can include your mortgage arrears in this if you qualify. This lets you catch up, get back on your feet, and even keep your home. You must typically keep making your current mortgage payments in the interim. If this seems impossible, look into whether you can consolidate your other debts into the payment plan as well. You must have enough income to qualify.
