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Loan Modifications: The SOS for Homeowners with Financial Struggles

Illnesses, divorce, loss of a job, or death in the family takes a great toll on your lives and finances. The stress is even greater if you are a homeowner dealing with a loan.

If you find yourself dealing with an unfortunate incident and are falling behind your monthly mortgage payments, you can still modify your home loan to catch up and avoid foreclosure.

Loan modifications are permanent restructuring plans of your original loan to help you pay. Modifying your loan means extending the term’s length, changing from an adjustable-rate mortgage to a fixed-rate loan. Calculate your home’s mortgage. Use a mortgage calculator and work with your lender in coming up with lower and more affordable monthly payments.

Who Qualifies for a Loan Modification?

Just because you struggle to make mortgage payments, it doesn’t mean you automatically qualify for a loan. As a rule of thumb, homeowners must delinquent. They can also qualify for a loan modification if they are facing imminent default, which means they’re not delinquent yet but there’s a high chance they will be. An applicant’s situation can fall under ‘imminent default’ if they lost a spouse, are unemployed, or have an illness/disability that has impaired your ability to pay for mortgage’s original terms.

Applicants for mortgage modification also require financial proof of hardship. This means compiling the following:

  • Bank statements
  • Recent federal and state tack returns
  • Letter of hardship
  • Pay stubs
  • All information concerning your loan

Types of Loan Modification

Mortgage loan agreement application with house shaped keyring

There are different ways for a lender to help a client modify their mortgage terms. Keep in mind, however, that not all lenders offer the options listed below. Your lender might also have additional options. No matter what your situation is, it’s best to explore each option before you make a decision.

The common types of modification include the following:

  • Lower interest rates. Ask your lender if they are willing to break on your interest rate. If they agree, the cut might be temporary. Still, know the details of your modification and confirm if the reduction is permanent.
  • Principal reduction. This option eliminates a portion of your original debt and recalculates payments according to your new figures. Lenders are often hesitant to saw off a portion of their principal; they’d rather suggest loan restructuring. But if you are approved for a reduction, consult with a tax professional to make sure the forgiven portion of your loan will not be subject to income taxes.
  • Extended terms. Lenders are also willing to recalculate loans based on longer payoff schedules. For example, your 15-year loan could be stretched to a 30-year loan. Be careful, though. Some extensions result in the homeowner incurring a sanction if they plan to sell their home. Scrutinize the modification for prepayment penalties first before you agree to extended terms.
  • Refinance your loan. Replace your current loan for one with longer-term, lower interest rates, or both.

Before you decide to modify your loan, seek advice from a professional mortgage lender. Consider your financial situation and paying abilities first and plan for your modification.

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