A loan modification is the restructuring of a current loan term. It is in response to a borrower’s inability to pay a loan. There are various ways to perform a loan modification; reduction of the interest rate, extension to the length of the loan term, a different type of loan altogether, or in some cases a combination of the three.
The important part of the loan modification process is to restructure the loan to where it is advantageous for both the borrower and the lender. The borrower needs to be able to afford the payment and the lender needs to know the amount at which the cost of modifying is less than the cost of a loan default.
The difference between forbearance and a loan modification is that a forbearance agreement offers only a short-term relief for the borrower who is temporarily in financial straits, and a loan modification is a long-term solution for the borrower who won’t be able to repay the current loan, ever.
Candidate must meet the following criteria to qualify for a Loan Modification:
1. Needs to show financial hardship. Examples include lost wages, adjusting mortgage, or rising house hold expenses.
2. Prepare documentation. Be able to prove the income and expenses that are being presented in client’s/borrower’s hardship.
3. Ability to repay the loan at a newly modified rate and monthly payment.
Being late on a mortgage payment automatically qualifies a candidate for a loan modification.