What is a lender modification?

A lender modification is when the lender makes a modification to the terms of a loan agreement. These modifications can involve permission to defer a payment, reduce monthly payments while extending the term, reducing fees and letting someone pay more over several months to make up for a missed payment. Less common lender modifications are the lowering the interest rate and reduction in the principal owed.

What is involved in a lender modification?

You must get any lender modification agreement in writing before you agree to the terms. Ensure that all of the necessary information is there. What is the new interest rate? What is the new balance? When will the new loan be paid off? Are they adding more fees or a balloon payment on the end? Do not sign anything until you have read it and agreed to it. Flee any lender who attempts to pressure you to sign loan modification without reading it.

What is a bad lender modification process?

Bad lender modification processes are common in the home mortgage industry. The banks received money from the federal government to process home mortgage refinances under Home Affordable Modification Program or HAMP. The unfortunate hole in the law was that lenders did not have to complete these loan modifications. So lenders let people apply and fill out forms for a home loan modification. Then they decided that the borrower was not qualified for the loan modification or offered terms that were clearly not manageable for the borrower.

Bad lending modifications also include lenders who offer to adjust the terms on a first mortgage but set payments that the person cannot afford. If you have a second mortgage, you are not eligible for the Home Affordable Modification Program, but the bank may be willing to let you apply in return for the government reimbursement and the time it gives them to try to foreclose on the property.

Unscrupulous lenders and fly by night operations have advised people to stop making payments in an effort to force a loan modification. When the person cannot get a loan modification or debt settlement, they end up losing the property like their home to foreclosure. In some cases, the loan modification application package is actually part of a scheme to steal your identity.

Good Loan Modifications

The Fair Housing Administration has the best options for loan modifications of your home mortgage. However, this option is generally available for those with an FHA backed mortgage. You may be able to apply for a lender modification with your bank, but this process is uncertain due to many legal ambiguities in the current process and ever-changing government rules.

Lenders are most willing to make loan modifications if you demonstrate an ability to continue making payments on time and in full if the loan is modified. If you have the ability to make payments and stop paying anything, they are more likely to foreclose or repossess the property than negotiate. If you can demonstrate a short term hardship like job loss and that you can now pay, you are more likely to receive a deferral, with the missed payments tacked on to the end of the modified loan.

Rick Abelmann runs a Hawaii bankruptcy law firm, Abelmann Law, who helps people regain control of their personal finances through debt resolution  options including bankruptcy.


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