A loan modification may help you avoid losing your home because you cannot afford your mortgage payments. However, not everyone is eligible for a loan modification for their mortgage. In this blog, our New Bedford bankruptcy lawyer explains how loan modifications work and what you can do if you don’t qualify.
How Does a Loan Modification Work and How Can You Get a Mortgage Modification?
A loan modification changes the terms of your mortgage to make it more affordable. It is a type of loss mitigation to help homeowners avoid foreclosure. A loan modification is different from a refinance. In a refinance, you take out a new mortgage loan to pay off the existing loan. However, a modification changes the terms of your existing loan.
Examples of the terms a mortgage lender may agree to modify include:
- The interest rate for the loan
- The term of the loan (extend the number of years to repay the loan)
- Changing an adjustable-rate mortgage to a fixed-rate mortgage
- Forgiving some or all of the past due amount
Generally, you must show that you have experienced a financial hardship, such as an injury or job loss, to qualify for a mortgage modification. Also, you must have a stable income that allows you to resume mortgage payments. The purpose of the loan modification is to reduce the monthly payments so they are affordable for the borrower.
You must contact your mortgage lender to request a loan modification. Several programs help homeowners with loan modifications. However, it is up to the mortgage lender whether they agree to modify a loan and what modifications they are willing to make. The loan modification process may vary between lenders, but it often requires submitting an application and supporting documentation to the lender.
What Are the Pros and Cons of Loan Modification in New Bedford, MA?
The immediate benefit of loan modification is reduced monthly payments. The modification can make your home affordable to keep, thereby avoiding foreclosure. Modifying your loan can also provide stable mortgage payments if you switch from an adjustable-rate mortgage to a fixed-interest-rate mortgage.
However, there could be downsides to modifying your mortgage loan. You may pay more money because the bank extends the term of the loan. Even though it might reduce the interest rate, you are making payments for a longer period. Modifying your loan could also negatively impact your credit score, but it typically is less severe than a foreclosure.
What Happens if the Lender Denies an Application for a Loan Modification?
If your mortgage lender denies your application for a loan modification, you might want to consider filing a Chapter 13 bankruptcy. The bankruptcy plan does not extend the loan or lower the interest rate. However, it spreads out the mortgage arrears (i.e., past due payments) over 60 months.
Additionally, the Chapter 13 plan combines the payments for unsecured debts into one lower monthly payment. You can afford to resume your regular monthly payments when you reduce the amount you pay each month toward other debts.
Filing a Chapter 13 bankruptcy does not add money to what you owe. Instead, it can reduce your debt and allow you to pay your debts over five years. Provided you pay your Chapter 13 plan payment and resume your regular monthly payments, your mortgage company cannot “deny” your bankruptcy like it can a loan modification application.
Learn More About Loan Modification During a Consultation
A loan modification can avoid foreclosure. Contact Logan A. Weinkauf, P.C., to discuss a loan modification. If loan modification is not an option, a Chapter 13 bankruptcy could help you keep your home and afford your mortgage payments by reducing your monthly debt payments.