What Initial Steps Are Needed to Modify a Loan?

by tammy on June 11, 2010

Basic modification of a mortgage loan is not a regulated practice in most jurisdictions, so really there is no set process or properly defined initial steps that are required to enter into loan modification negotiations with your lender. Essentially anyone, for any reason, can approach their lender and at least ask for a modification of the terms of a loan. However, realistically there are initial steps if you want to get a favorable loan modification agreement as opposed to some sort of loan forbearance program or the like.

Basically, people that owe mortgage loans have two possibilities when it comes to loan modification, either “voluntary” loan modification in which the borrower and lender (and perhaps a third party) works out an agreement and loan modification through the federal government’s Home Affordable Modification Program (HAMP). In either case, it is important to be able to thoroughly document a considerable level of financial distress or hardship from the outset.

Any loan modification proposed by the borrower is likely to be viewed unfavorably by the lender since it means either they will receive the same amount of money over a longer period of time or they will receive less money altogether. In either case, the lender will – as a general rule – not even consider loan modification unless the borrower can show true financial hardship and the terms of the loan modification are still better than foreclosure. Contrary to some of the claims made online, no lender – under any circumstances, even with HAMP – is obligated to agree to loan modification; so success depends on friendly negotiation and willing agreement as opposed to any sort of efforts at threats or coercion.

If you opt for “voluntary” loan modification negotiations, first you have to document your financial hardship and come up with a basic proposal that is more advantageous to the lender than simply foreclosing on you. In this respect, it may be helpful to hire a loan modification company to help, since the legitimate ones have a good understanding of what sort of terms are likely to be accepted and how to go about arguing your case. If you opt for bringing in a third party loan modification specialist, be sure to get a legitimate one and ideally one that usually properly accredited attorneys as this is much more likely to be taken seriously by the lenders than other loan modification service providers.

If you opt to attempt loan modification through the HAMP program, administered on the borrower’s side by the U.S. Department of Housing and Urban Development (HUD), then there is a specific process that has to be followed as described on the program’s website (http://makinghomeaffordable.gov/modification_eligibility.html). This involves filling out an application form and providing basic information to your lender. If you opt to go through the HAMP process, then there really is no need for third party loan modification specialists since the government program is designed to be very simple and direct and additional assistance is provided for free by HUD-approved housing counselors.   

The initial steps are different depending on how you decide to pursue the loan modification option. However, as a general rule, you will have to be able to comprehensively document your financial distress or hardship and you will want to consult with an expert; either a loan modification specialist (especially if they are legal attorneys) or with a HUD-approved housing counselor.

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