What Do You Need For Loan Modification?

Loan modifications can and do work, but their success depends upon the terms of the modification and how well the new agreement addresses the borrower's problems. For some borrowers, modifications end up costing more money out-of-pocket or over the long run than the original mortgage did. Rather than helping a borrower, these modifications often make the borrower's situation worse and, in some cases, guarantee that the borrower will lose the home.

Before seeking a loan modification, a borrower should understand why the current loan terms aren't working. The monthly payment could be too high for the borrower's current income level. In this case, the borrower should be seeking modifications that lower the monthly payment. Modifications that will lower the borrower's monthly payment include those that lengthen the term of the mortgage, reduce the interest rate on the remaining balance or reduce the balance due. Some modifications will combine these elements. If the end result of a loan modification isn't a lower monthly payment, the loan modification should be refused.

In other cases, the problem is that the value of the property has declined, and the borrower owes significantly more on the property than its current market value. In this case, the goal of the modification is to "right" the loan. The best way to bring the loan in line with the real value of the property is for the lender to forgive some of the remaining balance due.

This approach may not be the lender's first choice, but forgiving some portion of the principal owed is usually less expensive than a foreclosure and resale. An added incentive for borrowers to accept this kind of modification comes in the form of a tax break. Usually, forgiven debt is considered income for tax purposes. In 2009, forgiven mortgage debt (only) is exempt from income tax.

Still other borrowers are seeking to modify the terms of their loans to prevent adjustable rate mortgages from rising, to avoid a balloon payment, or to catch up on missed payments. Normal refinancing options may be unavailable due to new lending eligibility guidelines or a borrower's reduced equity. For these borrowers, simple loan modifications can address each of these issues, provided that the borrower can work his or her way through the lender's modification process.

If you would like to explore loan modification, but your lender is not responding, you're not alone. Many lenders have been inundated with loan modification requests. Consider working with a third party to negotiate a loan modification on your behalf. Working with a reputable loan modification firm that represents your interest and understands the process of loan modification can get you the terms you need when you need it.