How Does a Loan Modification Work?
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Gaining Popularity
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Loan modifications are becoming as popular as foreclosures. However, they are not new. Loan modifications were originally created to help a borrower avoid some of the outrageous fees associated with refinancing a home. However, now they are serving as a "bailout" for many homeowners to avoid foreclosure. In essence, a loan modification is one way to dress up a very ugly situation because the modification will create a way for the homeowner to be able to afford his mortgage payments again.
Reforming Your Mortgage
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A loan modification is a reform to your current mortgage. You might need the reform for variety of reasons --- job loss, illness, an adjustable rate, or any other unforeseen circumstance. Whatever the reason, you are unable to pay the mortgage at the current rate. A loan modification will "modify" the interest rate, the life of the loan, or the principal. There are quite a few ways for a lender to modify a mortgage. However, none of the alterations are in the lender's favor. They will inevitably take a financial loss; but it is cheaper than repossessing your home. In the end, the lender will lose a portion of his profit, but you can still be referred to as a homeowner.
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Application Process
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Before a loan modification can take place the lender must approve it. The guidelines for being approved for a loan modification are very strict and the rules are different for every lender. However, when the economic climate is bad, the guidelines tend to be more lenient. In order to have your situation reviewed by your lender you need to submit a formally written mortgage modification hardship letter. In the letter, you need to explain your financial hardship, or any other reason why you cannot pay your current mortgage payments. Then you will have to complete an application for loan modification. To ensure that you have all of the paperwork completed to the lender's satisfaction, you might want to consult a third party who is well-versed in this process. (See Resources)
Waiting Period
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On average, you should receive a decision within 30 to 90 days. The process can be shorter --- or longer. If you are represented by an attorney, or other representative, they you might be able to speed up this waiting process. However, if your loan modification is denied, you will be informed of the basis for their decision. If approved, your modification offer will be explained at this time.
Contingency Plan
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While you are waiting for a decision from your lender, you might want to explore a contingency plan. You need to know your next step if your loan modification is denied. In addition, loan modification is only one alternative to foreclosure. You might want to explore other options; for example, a short-sale, deed in lieu of foreclosure, or a loss mitigation service. (See Resources) Expect the best, while preparing for the worst.
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