Who qualifies for a loan modification

Who qualifies for a loan modification

Loan modifications are on most homeowner’s minds these days. There is a huge amount of information available on the net, and in the news about loan modifications. There are still many questions about loan modifications that have not been answered clearly and concisely.

One question that needs to be answered is what makes a loan modification a viable alternative to foreclosure for the lender. Make no mistake here, a loan modification needs to be a cost saving, smart decision for the lender before they will consider modifying an existing loan. So what conditions need to present for a lender to consider modifying an existing loan?

There are three musts that need to be present for a lender to consider modifying an existing loan. They are hardship, lack of equity, and proof that a homeowner can afford the modified loan payment.

The hardship is detailed in a hardship letter. This letter must demonstrate to the lender in a clear, factual, and concise way the hardship that has caused the homeowner to not be able to pay the current mortgage payment—OR—that the increased payment resulting from an adjustment in interest rate will cause undue financial hardship that will cause the homeowner to not be able to pay the adjusted mortgage payment. When determining whether a hardship exists look for something that has changed. Hardship, in this form, is defined as something that has changed that has caused income to go down or expenses to go up in a way that make the homeowner no longer able to make the current or soon-to-be current mortgage payment.

The lack of equity needs to be deficient enough that the lender cannot possibly sell the home without taking less than is owed. This means if the home is worth $500,000 and the money owed on the home is $650,000, the lender will not be able to sell the home after a foreclosure and get the $650,000 owed. If a home is worth $500,000 and the money owed on the home is $350,000 the lender will move forward with the foreclosure because it knows it can get its $350,000 back even if it sells it for less than it is worth. For a modification to be viable for a lender, they cannot get what is owed on the mortgage if they sell it in foreclosure.

Thirdly, and most importantly, the homeowner must be able to provide documentation showing that they can afford to make the proposed modified payment. Because this is not a refinance, but rather a negotiation between the homeowner (or their representative) and the lender, there are no published guidelines. All income can be considered as long as it can be documented. That means any documented income is acceptable if it can be documented. Common sense prevails in evaluating proposed loan modifications... remember, the lender does not want to take back the home.

For homeowners who can no longer make their current mortgage payment but who can make a lower payment, a loan modification can save their home. For lenders with non-performing loans, loan modifications can be the fastest and least cost solution to working out that loan.

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