Modifying a loan is getting on the re-negotiating table with the person or organisation or institution that lent you money or funds for the realisation of a particular project. That is relooking at the terms and conditions of the loan agreement and adjusting / amending it to a more reasonable level for the borrower. This is usually done to improve current status or to avoid situations such as foreclosure. In the case of a mortgage loan there are certain procedures put in place to modify the loan program especially to a more affordable plan but this varies from place to place depending on the financial legislations and regulations in force in the said jurisdiction. When modifying a loan, one of these factors is usually placed on the negotiating table and typically for reduction reconsideration:
- Modification of loan terms and type
- Interest rates
- Repayment schedule and package
- Timeframe
What are the benefits of modifying a loan?
- Modifying a loan gives an opportunity for amending the terms and conditions of one’s previous loan agreement, hence improves or relieves the borrowers stress
- Loan modification ameliorates the business tension between the loaner and the borrower
- It could bring about the reduction in the interest rates
- It could ameliorate the repayment plan to a more reasonable deal for the borrower
- Its repercussion on one’s credit score or value is less significant than that of a foreclosure
- The borrower continues to benefit from the terms and foreclosure is put on hold, hopefully permanently
Loan modification from the loaner’s perspective
Mortgage institutions or banks commonly stand to greatly lose financially in the advent were the mortgagee is in the position where they can no longer make their loan repayments. Here are some of the options open to the bank when the borrower is unable to repay their loans promptly and adequately:
- Foreclosure in the case of a home. Bank repossesses the property mortgaged
- Financial institution collects or hires a third party to collect the payments via garnishment or levy or fees etc.
- The bank could abandon the case.
- The bank can wait for the homeowner to declare bankruptcy and hence gain full ownership from the borrower with little payoffs.
Loan modification therefore benefits both the mortgager and mortgagee but not in all case proves to be more profitable for the financial institutions than a foreclosure.
How to approach loan modification
Step 1: Put together your financial information – gather all necessary financial documentation related to the loan. This is essential before laying one’s case in front of the loaner. One has to ensure the following documents are inclusive:
- Terms and conditions of the previous loan
- Financial and bank statements
- The repayment schedule and how it has been going on (this should include credit card payments and or student / car loans)
- Proof of income or revenue details including income tax returns
Step 2: Prepare to explain why you need a loan modification – be prepared to describe the adversities and financial difficulties you are going through vis-à-vis your current loan package be it a short or long term issue. The loaner understanding your situation is the greatest key to having a loan modification and hence will be better placed to suggest a more suitable solution.
Step 3: Quickly contact your loaner or financial organisation or institution – request for a loan modification and enquire on the eligibility of your case towards the said modification. Most mortgagers want to help and keep borrowers from foreclosure while ensuring they remain loyal
Step 4: Ask questions and stay in touch – always do a due diligence research on the procedure of modifying a loan and what package is most suitable for you. If need be get advice from an expert in the domain. Stay in touch with the lending financial institution so as to be updated as to the progress of your application or eligibility for a loan modification.
Step 5: Persistency– remain persistent in the demand for a loan modification; the process might be frustrating, time demanding, and require the resubmission of justification documents. Be steadfast and ride it off
What to avoid when modifying a loan
There are some businesses or mortgage modification facilitators or helpers that propose their services in accompanying you through the process. They are usually expensive and sometimes require as payment for their contribution the sum equivalent to a monthly mortgage payment.This extra expenditure can prove to be heavy on some persons or families battling to balance up their cash flow or financial situation.
Bear in mind that the same information and documents one would present to these businesses required for modifying a loan are same documents required by the financial institution, so why not just approach the bank on your own and demand for a loan modification. That notwithstanding the choice to hire a loan modification facilitator although not indispensable or essential depends on the borrower.