Is it Too Late to Get a Loan Modification?

by tammy on March 18, 2010

In general, the process of having the terms of your mortgage loan modified is an impromptu one, meaning there is no official time limit that is imposed on asking for loan modification. Borrowers can ask for a loan modification while they remain current, once they become delinquent, after the loan is in default, or even after the borrower has filed for bankruptcy or the lender has initiated foreclosure proceedings. However, it can be safely assumed that the earlier a borrower asks for a loan modification, the better the options available to them will be, though this is not always the case.

Ultimately, it is the lender that determines whether or not to accept a loan medication proposal and they can accept or refuse such an agreement at any time and for any reason. The lender is not obligated to agree to any changes in the terms of the loan unless the borrower files for Chapter 13 bankruptcy and the courts impose a loan modification agreement on the lender. Otherwise, the lender is at perfect liberty to accept or refuse any loan modification suggestions as they see fit.

Prior to the collapse of the housing market and the economic downturn, most lenders flatly refused to even discuss loan modification with borrowers since there were plenty of alternative buyers available. This has obviously changed a lot now that the value of most residential property has declined and many fewer people qualify for mortgage loans in the new, stricter credit environment. This means that today it is frequently in the lender’s better interest to keep the existing mortgage loan, even with less profitable terms, than to foreclose and then try to resell the property at the lower values. This means that at least some lenders are more likely to consider proposals for modifying the terms of a mortgage loan than was previously the case.

Virtually all loan modifications suggested by distressed borrowers are viewed negatively by the lenders; therefore most lenders are less than enthusiastic about agreeing to any modification suggestions. In theory, it would seem that the best time to ask for a loan modification is before the borrower becomes delinquent; especially if they can clearly document that they are suffering financial distress that is likely to increase as time goes on. However, many lenders will not even consider a modification until the borrower is already delinquent and facing eminent default. All said this is short-sighted and usually ends up causing both the borrower and the lender more problems – and costing them more money – than would be the case had a reasonable modification been approved before the situation became too extreme.

Short-sightedness on the part of the lenders notwithstanding, there is no specific time limit on when a borrower can ask for a loan modification. Even after the loan is actively in default and even after the lender has initiated foreclosure proceedings, the borrower can suggest a loan modification arrangement as a last minute compromise. Foreclosures usually cost the lender an addition $20,000 to $40,000, so if the lender is in financial trouble itself, it might stimulate an interest in modifying the loan. This is particularly true if the property is in an area where it is unlikely to sell quickly.

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