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Loan Modification Basics

A loan modification is a restructuring of your mortgage agreement terms. It can be a reduction in the amount of interest, an extension in the duration of the loan, or a reduction of the monthly payments or principal.

Lenders are not generally conducive to modifying homeowner loans unless there are extenuating circumstances such as a hardship that you can document to the lender’s satisfaction. For others, there are federal programs for which you may qualify.

If you are having trouble making your loan payments, be aware of some loan modification basics.

Acceptable Hardships

For distressed homeowners who are having difficulty making their monthly mortgage payments and who are facing possible foreclosure proceedings, lenders may accept hardships that qualify for loan modification. Hardship situations may include:

  • Your adjustable mortgage just reset to a higher amount
  • You are facing foreclosure
  • Death of a spouse or civil-union partner
  • Catastrophic illness or injury
  • Loss of employment
  • You have been deployed for military duty

If you have suffered an acceptable hardship and can provide documentary proof of the situation, you still must have a source of income from which to make even reduced payments. You may have to produce a co-signor or other reliable income source if you are not employed.

Advantages and Disadvantages

Some of the obvious advantages to obtaining a loan modification are:

  • Avoid foreclosure
  • Possible waiver of late fees
  • Ability to get a fixed interest rate
  • Your interest rate may be reduced considerably
  • You can avoid an adverse impact on your credit score
  • Avoid a short sale

One disadvantage is that you cannot increase the principal amount of the loan or withdraw equity as you could in a traditional refinance. Also, some lenders may ask for a down payment. Try to get a repayment plan for your arrearages before being reviewed for the modification.

Avoiding Scams

There are some pitfalls in trying to qualify for a loan modification when using a financial or legal professional to assist you. Warning signs to look for include:

  • The individual or firm asks for an upfront fee without any guarantees.
  • Your attorney or law firm has questionable ethics or a record of disciplinary action by the state bar association.
  • Your legal or financial professional is inaccessible.
  • You are being solicited.

Avoid such situations by asking for a referral from your local bar association for an attorney who is reputable and experienced in loan modifications or by directly calling your lender to discuss a loan modification. Having a qualified attorney supporting you, however, is preferable to dealing with the lender on your own. An attorney will add credibility to your negotiations and ensure that state and federal laws are being followed.

Also, research federal programs like the Home Affordable Modification Program (HAMP), or consult an attorney to determine if you would benefit from this program.