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Loan Modifications

What is a Loan Modification?

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Loan Modifications are changes to your loan agreement. Your payments get more affordable, and you don’t have to default on your loan. Banks choose to offer loan modification programs because it is easier and cheaper to work with you than to go after you.

Why do Banks Offer Loan Modification?

If you stop making payments, the bank has several options.

  • Attempt to repossess property (a home foreclosure, for example)
  • Attempt to collect (through wage garnishment or a bank levy), or hire somebody to do so
  • Give up hope and accept the loss
  • Watch you declare bankruptcy and receive little or nothing

None of these options are attractive to you or the bank. Your credit will suffer, and there’s a financial cost to the bank. Banks are not in the business of managing property, and you'd probably prefer not to move.

Is there another option? Yes - banks offer loan modification so that they don’t have to do any of the above. Loan modification can be less expensive and more profitable for banks, but not in every case.

How do I Get a Loan Modification?

To get a loan modification you generally have to ask. Call your lender and let them know about your financial situation. Just be honest and explain whether or not you’ll be able to make your payments. Ask what options are available to you. If they see things the same way you do, you may qualify for a loan modification.

Banks have different criteria for approving modification requests, so there is no way to know ahead of time if you’ll qualify - the only way to find out is to ask.

What Types of Loan Modifications Exist?

Banks can change the terms of your loan to make the payments more affordable. These changes may be permanent or temporary. In any case, the result is a more manageable payment while you get back on your feet. For more details about the logistics, read up on the different loan modification options that your lender might offer.

With lower monthly payments, you could end up paying more in interest over the years. If loan modification keeps you afloat in the near term, it may be worth the cost. However, make sure you know what it'll cost you and that it's your best option - not just a way to free up cash each month.

Read on to see tips on requesting a mortgage modification.
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