What Is a Temporary Loan Modification?
If you request a loan modification from your lender, the lender will review your payment history and your interest rate to determine whether you are a potential candidate. In most cases, a lender requires that you be several months behind on your mortgage payments to be eligible for a loan modification. If your lender believes it can help you, it will request financial information from you. After reviewing your finances, it may decide to give you a temporary loan modification. This will give your lender time to thoroughly underwrite your file and monitor your payments to determine whether you are able to pay the reduced payment, on its due date, for several months.
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Loan Modifications
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In most cases, a loan modification will lower your interest rate and add any delinquent payments to your principal balance. The interest rate is determined based on your income and your monthly obligations. A lender typically looks at your debt ratio, which it calculates by dividing your monthly payments by your gross income. Your lender will adjust your interest rate down so you will be able to afford your new mortgage payment. If necessary, the lender can extend the term of your loan to bring your debt ratio to an acceptable level.
Considerations
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Your lender may agree to a temporary loan modification and accept payments from you for several months. This does not mean you will receive approval for a permanent modification. You may make all your payments on time during the temporary modification and still be declined for a permanent modification. It is entirely up to your lender. If you do not receive a permanent loan modification and you cannot afford your regular mortgage payment, you should seek alternatives.
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Short Sale
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You can list your home for sale and hope it sells before you lose it to a foreclosure sale. If you owe more than your home is worth, you have a few choices. You can walk away from the property and find a place to live that you can afford, or you can ask your lender whether it will agree to a short sale. A short sale allows you to sell your home for the market value, which may be considerably less than what you owe.
Bankruptcy
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If all else fails, you can consider filing for bankruptcy protection. If you cannot afford your mortgage payment, a Chapter 13 filing will not be practical, but you can file under Chapter 7. It may be possible to eliminate enough of your other debts to enable you to afford your mortgage payments. If not, the bankruptcy usually stops the foreclosure process for a few months so you can put away some money for moving expenses and a deposit on a place to live. A bankruptcy will remain on your credit report for 10 years.
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