Loan Modification Types and Eligibility Criteria

Guest contributor: Frank Martin

Loan modification is the process where the terms of the mortgage are modified outside the original terms of the contract agreed to by the lender and the borrower. In case of adjustable rate mortgages, interest rate and monthly payment move up as with rise in the market rate of interest. This puts many homeowners in financial troubles and even some cases of foreclosures may also take place. For these troubled homeowners, there is a solution, which is known as loan modification. It allows you, the borrower, to work out more comfortable terms with the lenders. This helps stop the foreclosure process and buying you more time to get back on track.

One important requirement for a loan modification is a hardship letter which should elaborately explain the nature of your financial hardship. The reasons you furnish to opt for loan modification should be valid enough such as death in the family, job loss and medical emergency. You should also produce proper documents such as tax forms, bank statements and pay stubs, which unquestionably prove your financial incapacity.

Types of modification

Mortgages can be modified in different ways so as to provide several benefits to the borrowers. Here are different types of loan modification.

• Cutting down the rate of interest.
• Shifting from an adjustable rate mortgage to a fixed rate mortgage.
• Scaling back the principal amount.
• Waiving the late fees & other penalties.
• Extending the loan term.
• Limiting the monthly payment to a certain percentage of the total household income.

The borrowers who are seeking loan modification can be current on the loan, making late payments, or has defaulted in making monthly payments for 2-3 months, at the time the application for modification is made. The programs can vary according to the individual cases. Modifications are made at the discretion of the lender. The lender may be motivated to offer better terms to the borrower because of the expectation that the borrower might be able to afford a lower payment and get current on the loan.

Eligibility criteria

The lenders have different degree of willingness to work through loan difficulties, but to be eligible for loan modification, you need to fulfill some criteria. Here is the list of eligibility criteria.

• The mortgage should be in use in its present form for more than a year.
• The borrower in question should not currently be in bankruptcy.
• Your mortgaged property is your primary residence.
• The borrowers have to sufficiently prove that they have some sources of income.
• You must possess valid supporting documents to prove that your income has been significantly reduced.

Apart from these, the reduction in income however should not arise from some voluntary reasons such as voluntary retirement.