What Is a Loan Modification?
In case you are struggling to pay off your loan, you should know that it’s possible to modify your loan contract. A loan modification can be defined as a change made to the terms of an existing loan. This modification can be made by the lender or the borrower, and it is typically done to make the payments more affordable. Here we will discuss what loan modification is, how it works and whether is it a good option for you or not.
In some circumstances, there is an opportunity for either borrower or a lender to change the terms of an existing loan. This is called a loan modification agreement and can extend the term of the loan, lower the interest rate, or do both. These modifications are often used to help borrowers who are struggling to make their payments on time or at all.
If you for example took out a mortgage but now having trouble making your payments, you may want to consider a loan modification. A mortgage modification can lower your interest rate or extend the term of your loan, depending on what you desire. All you need to do is contact your lender to see if you qualify for this. Modification can be made through a government program called the Home Affordable Modification Program (HAMP). This program was created in 2009 to help borrowers who were struggling to make their mortgage payments due to an ongoing financial crisis. This loan modification allows homeowners to modify FHA-insured mortgages to reduce monthly payments.
How Does a Loan Modification Work?
When a borrower is having difficulties with paying their loan on time, they can apply for a loan modification with a lender. If the lender agrees to this modification loan, they’ll change the terms in order to make it more affordable. All you need to provide is financial information to show that you are having problems with making payments.
People usually seek home loan modification because repaying the mortgage is a long process and they don’t always budget everything properly. Getting familiar with a loan modification process can also be good even if you planned everything ahead but due to the current financial crisis, you are unable to continue with your normal payments. Depending on your lender, if they see you’re struggling they can even suggest this modification. Doing this can help you keep your home if you are struggling.
In case you are a business owner and need loan adjustments you can get an SBA loan modification if your business has revenue but due to some circumstances, an old loan makes no longer financial sense.
Loan Modification vs. Refinance: What’s the Difference?
When it comes to mortgage relief, there are two main options available- loan modification and refinancing. Both can help make your monthly payments more affordable, but they work in different ways. Let’s see how they compare so you can choose the right one for you.
Loan modification can lower your interest rate, extends the term of your loan, or both. This will make your monthly payments more affordable and help you with budgeting it all in. Applying for a modification can be a good option if you’re struggling to make your current payments, but you still want to keep your home.
Refinancing involves taking out a new loan with a lower interest rate, shorter term, or both. It will essentially do the same- lower your monthly payment, but be cautious because taking out a new loan can require you to pay closing costs. This can be a better option for you if you have equity in your home and want to get cash out to help you with some other expenses like debt consolidation or home improvements.
So, which one is right for you? The answer depends on your personal situation. If you’re struggling to make your current payments, but don’t want to potentially lose your home, a loan modification might be the way to go. If you have equity in your home and you need some extra cash, refinancing could be the better option.
Loan Modification: The Benefits and Drawbacks
A loan modification can sound like a perfect option if you’re having trouble with payments but don’t consider it a miracle. You shouldn’t forget that you still need to make timely payments on your modified loan, and you may be required to pay additional fees.
Before making any decision it’s important to first understand the potential upsides and downsides of these loans.
Benefits
There are many benefits associated with these loans. They can lower your monthly payments, which can free up some of your money you can then use for other expenses. It will also help you keep your home if you’re struggling to make payments.
By modifying your loan, you can also pay off your debt faster. By reducing your monthly interest rate, you’ll be able to pay more towards the principal of the loan each month. Doing this will help you pay off the debt sooner and can save you money in the long run.
Drawbacks
When you decide to modify your loan, you may be extending the length of it. This means that you will be paying it for a longer period of time and also potentially end up paying more in interest throughout the loan. To put it simply, you will be paying less in interest fees every month, but because it will take you more months to pay everything off it can easily add up.
Another drawback to these modifications is that they can negatively impact your credit score. If you are already behind on your payments, your credit score will be lower. But if you get a modification and still fail to make these payments on time your score will sink even further.
Lastly, some lenders may be reluctant to approve this loan modification. If this is the case for you, we suggest you look into other options like refinancing or foreclosure.
How to Get a Loan Modification?
Loan modifications can help make your payments more affordable but don’t get discouraged because it can be a bit complex and confusing.
Getting a loan modification starts with reaching out to the lender you took your loan from. Then you will get an opportunity to explain your financial situation and current struggles. Loan modification requirements may vary depending on the lender. But after this lender will carefully review the application you submitted and other documentation you provided to determine if you qualify for a modification.
If you get approved, you and your lender will work together to modify the terms. This can include changing the interest rate, extending the term of the loan, or adding a forbearance period. Once the new terms are in place and you both agreed upon them, you’ll sign a modified loan agreement and begin making your modified payments.
This whole process can be time-consuming and frustrating, but it’s definitely worth it because you will get to keep your house.
Is a Loan Modification a Good Idea?
There are some pros and cons to these loan modifications. Depending on your personal situation and future plans they can be a good fit.
Signing this modification can help you lower your monthly expenses and make your mortgage more manageable in the current crisis. However, this modification can negatively impact your credit score if you fall behind once again on your payments.
Before making any decision, you should speak with a financial advisor to get an unbiased opinion and to get even some necessary help in this whole process.
Final Thoughts
This topic is really important to understand and whether you are currently in a situation where you need a loan modification or not, you should know about this option. Many things are going into loan modification so before deciding anything, understand it all, weigh out the pros and cons and talk to a lender or housing counselor. This can help you understand the process a bit better and know what you can expect from it.
