What is a Hardship Situation When it Comes to Loan Modifications?

by tammy on March 24, 2010

As a general rule, it is safe to say that most lenders will never be too enthusiastic about any borrower proposed loan modification agreement. Even in the best case scenario it means that the lender will receive their money slower than originally agreed and in the worst case that they will receive less money than originally agreed. Therefore, for a loan modification proposal to even be considered, it is usually essential for the borrower to show, in substantive terms, that they are currently experiencing financial hardships that make the original payment terms too difficult for the borrower to maintain.

In a straight loan modification proposal being conducted directly between the borrower and the lender (with or without the help of a third party loan modification specialist), there are no fixed definitions of what kinds of hardship may be taken into consideration. In such voluntarily loan modification negotiations, the lender may choose to consider the borrower’s proposal on whatever terms it prefers. Some lenders may be willing to work with distressed borrowers much more readily than others, depending on that lender’s specific policies and whether or not the modification can be viewed as preferable to the alternative. Other lenders are stricter and may not even consider loan modification as an option until foreclosure or bankruptcy proceedings have already been initiated.

The guidelines for bowers applying for loan modification through the federal government’s Making Home Affordable program (www.makinghomeaffordable.gov) have more specific terms regarding what forms of hardship qualify someone to take advantage of this program. Generally speaking, the borrower has to be able to document one of three particular conditions in order to qualify: (a) the mortgage payments have significantly increased to a level that too much of the their gross income is being spent to make the payments; (b) that the borrower’s income has dramatically decreased, making the old payment schedule impossible to meet; or (c) that their has been a very specific incident resulting in massive financial hardship (like medical bills).

Beyond simply making the claim of financial distress or hardship, borrowers will usually have to document this thoroughly, providing all the relevant documentation needed to substantiate the claim. Being unable to specifically document the cause and effect of the financial distress is almost guaranteed to mean that the claim will be disregarded by the lender, therefore it make good sense to be sure you get all the relevant information together before even proposing for a loan modification. Bear in mind that many lenders – even those participating in the Making Home Affordable program – consider it in their best interest to drag out and prolong loan modification negotiations as long as possible, so not having all the proper documentation ready from the beginning can provide an excellent excuse for the lender to move very slowly.

The success or failure of a particular loan modification proposal depends in large part on the financial condition of the lender and the resale potential of the property in question. Lender’s facing a major financial crisis in their own right may be more inclined to negotiate than those in better shape. Similarly, if the property in question is not worth the amount covered by the current mortgage or has low resale potential, the lender may view loan modification as a lesser evil and be more accommodating.

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