What Is a Bank Modification Loan?
Banks offer modification programs to homeowners to avoid the foreclosure process. Foreclosures can be expensive for banks since most banks earn revenue from interest payments made on the loan rather than owning real estate. The federal government created the Making Home Affordable program in 2009 to provide help for homeowners seeking loan modifications. They streamlined guidelines for banks to follow when approving homeowners for assistance.
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Loan Modification
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Loan modification is the permanent restructuring of your mortgage loan. Unlike a refinance, which replaces your existing loan with a new loan bearing different terms, loan modifications alter your mortgage guidelines without the appraisal or credit check that is generally required to obtain a new loan. Modification can work by extending the life of your mortgage loan to reduce your payments, or by adding the amount of your past due balance onto your principal so that your mortgage loan becomes current. Late fees are generally waived once your modification is processed.
Who Qualifies
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To qualify for a bank loan modification, you must have demonstrated financial hardship. Lenders require documentation of financial need in the form of a hardship letter. Mortgage hardship letters detail the events that led to your mortgage loan falling behind. A good hardship letter should be descriptive but brief. Include copies of your household bills and income statements with your letter. Banks are more likely to grant a loan modification to a homeowner with little negative equity that can easily be resolved through a lowered monthly payment. Homeowners without a steady source of income to support a lowered payment do not qualify for loan modification.
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Where to Obtain
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Organizations like the Neighborhood Assistance Corporation of America (NACA) and the federal Making Home Affordable program are available nationwide to homeowners seeking loan modification. Alternatively, contact your bank to learn whether they participate in any other programs that will help you prepare for a loan modification. Preparation is essential before communicating with your bank, as submitting the wrong information can lead to a rejection of your loan modification. Consult with an HUD-certified foreclosure counselor through NACA or Making Home Affordable to make sure you put forward an enticing loan modification request.
Considerations
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Loan modification is a suitable option for homeowners with verifiable income. Banks modify loans to help you gain financial stability and avoid abandoning the property. In many states, banks have the option of filing a deficiency judgment, but homeowners who are still facing financial hardship following foreclosure are not likely to have funds to continue making payments on the remaining mortgage debt. Instead, banks find ways to negotiate with qualified homeowners through mortgage loan modification. As long as you pass the trial period required by your lender, your loan modification terms become permanent.
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