Due to unforeseen life circumstances, many individuals fall behind on mortgage payments, which will eventually lead to foreclosure proceedings. In order to avoid foreclosure, or during the foreclosure process, an individual may seek a loan modification from the lender. A loan modification is a permanent restructuring of the mortgage terms to provide a more affordable payment to the borrower. In general, the primary goal is to help the borrower reduce their monthly mortgage payments to 31% of their gross income.
How Loan Modifications Work
Loan modification typically provides a reduction in the interest rate, forgiveness of the principal amount owed, an extension of the length of the loan, a different type of loan, or a combination of these solutions. Likewise, many banking institutions are generally receptive to provide loan modifications in order to avoid foreclosure, paying property tax, and manage the property.
Generally, to be eligible for a loan modification, the borrower must demonstrate they cannot make the current mortgage payment due to a financial hardship, complete a trial period to establish the borrower can afford the mortgage payment, and provide all required documentation.
In order to begin the loan modification process several documents will be required. The following documents will be needed to submit to the lender:
- Past two months or recent bank statements (personal, savings, stocks, ect.);
- Any Quickbooks information;
- Social Security/Pension/Retirement Award Letter (if applicable);
- Social Security/Pension/Retirement Award Letter for Spouse (if applicable);
- Utility Bill;
- Past Two Months of Paystubs (Borrower & Co-Borrower);
- Hardship Letter;
- Copy of the Last Filed Tax Return; and
- Profit & Loss Statement (if applicable).
Documents required will vary depending on the household size, and whether the borrower is self-employed, in addition to other factors. If the borrower is approved for a loan modification, the borrower will typically need to successfully complete a trial period prior to a permanent modification being offered. Typically, the borrower will need to timely pay the new monthly payment for three to six months.
Our firm has extensive experience with loan modifications, both in and out of bankruptcy proceedings. If you are interested in filing for bankruptcy to stop a sheriff’s sale and participate in the bankruptcy court’s loss mitigation program, or if you need to seek a loan modification outside of bankruptcy, please contact our firm to discuss your potential options.