Loan Modification Schemes for Affordable Payments

by admin on November 13, 2013

Financial institutions offer various loan modification schemes to help borrowers who face financial hardship to avoid default.

Definition

Loan modification is a practice that allows banks to adjust the terms of a mortgage and make the payments more affordable. The bank and borrower negotiate to change the contract terms. There are different ways to modify the original contract. The bank may reduce the interest rate, extend the repayment term, or both. Lenders usually agree to modify the original contract because they will lose less than the cost of default.

Forbearance vs. Modification

A forbearance agreement is offered to borrowers with financial problems. It is a form of temporary relief for debt-ridden customers rather than a long-term solution. In essence, this is an agreement that allows borrowers to avoid foreclosure. Loan modification is considered a permanent solution.

Required Documents

Financial institutions require that borrowers present certain documents before they proceed with loan modification. These include a hardship letter, bank statements, tax returns, proof of income, loan documents, and others. The bank may require recent pay stubs, home valuation, projected financial statement, cover letter, and proof of hardship. The latter can be in the form of bankruptcy papers, divorce papers, medical bills, death certificate, birth certificate, and so on. Home valuation is done by a real estate agent, appraiser, or another professional to determine the value of the property.

Gather documents that offer information about your unsecured loan, home equity line of credit, second mortgage, assets, and deposits in money market, savings, and other accounts. In the hardship letter, describe any circumstances that led to the current situation. This can be prolonged illness, complicated divorce, unemployment, or anything else. Basically, the hardship letter describes the nature of your problems. Check your bank statements to find your monthly and minimum payments on car and student loans, mortgages, and credit cards.

Loan Modification and Steps

To meet the eligibility criteria, borrowers must prove that they are unable to meet their monthly payments. The next step is to complete a trial period during which the borrower demonstrates that the payment is more affordable. Questions to ask your financial institution relate to issues such as the length of the procedure, eligibility criteria, whether you will be sent late payment notifications once the terms have been modified, and others. Look for traps and red flags such as balloon payments, rates that adjust frequently, steep interest rate increases, time bombs, and others. Some financial institutions include terms that provide additional legal protection for them. For example, if they lose your papers, you are required to help the bank to reproduce them. If you are unsure how to go about all of this, you may hire a loan modification firm or an attorney. A non-profit housing group is another option.

It is important to be honest and realistic. If the amount is too high for you to afford, let them know. Explain why the modified loan is too expensive for you. Foreclosure is very expensive for financial institutions, and they may be willing to reconsider your case.

Alternatives to Loan Modification

The right solution depends on your circumstances – debt amount, interest rate, repayment schedule, type of mortgage, financial institution, and many others. You can choose from different options such as consumer proposal, debt consolidation, credit counseling, and filing for bankruptcy. Bankruptcy is a solution only if it helps protect certain assets. There are benefits such as freezing interest payments and stopping harassing calls from financial institutions.

 

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