Is A Loan Modification Right For You?

Are you struggling to make your monthly mortgage payments or have you fallen months behind? If so, you may be at risk of losing your home. Depending on the circumstances, you may be eligible for a loan modification, which can help reorganize your mortgage payments and avoid foreclosure. But this isn’t a no-brainer as there could be unintended consequences.

What is a loan modification?

A loan modification is different from refinancing. A loan modification changes the terms of your existing loan, whereas refinancing entails replacing your loan with a new mortgage.

The terms of your modification are up to the lender and will depend on what’s best for the borrower. This could mean extending the length of your term, lowering your interest rate or changing from a variable interest rate to a fixed-rate loan.

Who qualifies for a loan modification

Not everyone struggling to make a mortgage payment can qualify for a loan modification. Homeowners typically either must be delinquent for about 60 days, or they must be in imminent default, meaning they’re not delinquent yet, but there’s a high probability they will be.

Homeowners usually must also demonstrate they’ve incurred a hardship. This could be the loss of a job, loss of a spouse, a disability or an illness that has affected your ability to repay your mortgage on your original loan terms.

Know before you modify

Disadvantages: If the loan is being modified due to financial hardship, you may see a note about this added to your credit report, negatively impacting your credit score. The result won’t be nearly as negative as a foreclosure but could affect other loans you apply for in the future.

Another thing to be aware of, is that depending on how your loan is modified, your mortgage term could be extended, meaning it will take longer to pay off your loan and will cost you more in interest. The lender won’t “forgive” any debt you’ve accrued, they just wrap it into the new loan.

IMPORTANT NOTE: A large percentage of homeowners that end up getting a loan modification approved, will continue to have issues making payments going forward. If a modification is approved but the owner’s financial situation doesn’t change for the better, then they will find themselves behind on payments once again. The downside is that now it will be much harder to sell your home to an investor or cash buyer – much of the equity in the home is gone, and these homes frequently end up at the foreclosure auction.

Common Questions About Forbearance Plans

Question: Can anyone get a loan modification?

Answer: No, in most cases the lender will have to review each homeowner’s individual circumstance to see if they are eligible.

Question: Will a loan modification affect my credit report?

Answer: In all likelihood, yes. It’s nowhere near as bad as going through foreclosure though.

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