Information on Loan Modification
When a mortgage payment skyrockets, a borrower may need a loan modification to bring his mortgage payment back within his financial reach. The economy, adjustable interest rates and unemployment are some reasons a homeowner may have trouble paying his mortgage. Before the mortgage crisis of 2008, loan modifications were only used as a way for homeowners to avoid the high fees of a refinance. But as of early 2009, loan modifications are being used to keep a financially troubled homeowner in his home.
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Identification
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A loan modification will essentially "modify" the terms of a loan agreement. There are numerous ways to modify a loan. For example, a lender can lower the interest rate, extend the life of the loan or decrease the amount of principal owed. Ways to modify loans are being created almost as fast as the foreclosure rate. However, loan modifications are not just offered to every borrower who can no longer afford his monthly loan payments. A loan modification has to make financial sense for the borrower and the lender. For instance, if it would cost a lender more money to foreclose on a mortgage loan versus modifying the loan agreement, the lender will consent to modifying the loan.
Types
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The most common loan modification is to reduce the interest rate. This can happen in one of two ways: first, if you have a loan with an adjustable interest rate, your lender may switch your interest rate to a fixed rate that you can afford. Second, your lender may cut your rate for a specific period of time--usually 2 to 5 years, in some cases longer. If your financial hardship will only be temporary, your lender might only offer you the second choice.
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Prevention/Solution
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Each lender has different loan modification requirements. If you believe you will face financial hardship, the only way to really know if you will qualify for a loan modification is to ask your lender. You will have the best results if you contact your lender before missing any of your loan payments. This will show your lender that you are attempting to be financially responsible.
Application Process
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In most cases, the lender will require that you submit a written "mortgage modification hardship letter". The letter must explain why you cannot hold up your end of the loan agreement. Also, you must complete the loan modification application. You may want to consult a knowledgeable third party to help with the application process. The approval guidelines can be very strict for a loan modification, so to increase your chances of approval, you want to ensure that all of the information is filled out correctly.
Time Frame
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Your lender will typically decide on your loan modification within 30 to 90 days. If your attorney is representing you, your wait time might be a little shorter, but having representation does not guarantee a shorter decision time. In the event that your loan modification application is denied, your lender will inform you why it reached the decision. If your loan modification is approved, the modification of your loan will be explained to you upon the approval.
Benefits
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In early 2009, The Obama Administration introduced the Making Home Affordable Plan to address the mortgage crisis in the United States. Loan modification is one of the ways the plan is used to keep a homeowner in his home. If you are still current on your loan payments, but you are barely able to make them, you may be eligible for assistance from this program. To see if you qualify you can visit the Making Home Affordable website. (See Resources for the direct link)
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