Loan Modification Laws

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 What Is a Loan Modification?

Loan modification is a term that commonly refers to the adjustment of monthly payments on a mortgage loan. The adjustments of monthly payments often involve a reduction or increase of the monthly payment amounts by changing the previous interest rate on the loan, which in turn lowers the monthly payment amount.

However, a loan modification may also involve a change to the overall type of mortgage that was issued. Further, if there are arrears on the loan, then the loan may be lengthened, adding in past due payments in order to allow the borrower to catch up on their payments over time. This is known as recapitalization.

A mortgage modification is usually done if the borrower is having trouble keeping up with their current loan and is not able to make timely payments. It is important to note that loan modification terms will almost always be governed by the contract laws and principals in their jurisdiction. This means that in order for a loan modification to occur and alter the original terms of the loan, both parties must first agree to any changes that are to occur.

In almost every case, the modification of the terms of the loan will be negotiated between the borrower and lender, and then the changes to the existing agreement will be agreed to in writing. However, if there is a violation of the current loan agreement, or if the terms of the new agreement are violated, that can lead to various legal issues. For example, a foreclosure proceeding can be started by the lender.

It is important to note that a loan modification is different from a forbearance agreement. A forbearance agreement only provides a short-term relief for borrowers who are having financial problems, whereas a loan modification agreement alters the original terms of the loan in order to provide a long-term solution for the borrower.

In general, a loan modification is typically sought as an alternative to initiating bankruptcy proceedings or being foreclosed upon. If a borrower has their home foreclosed upon, or if their loan goes into default, then the lender has the right to report such activities to the credit bureaus. This would then affect the borrower’s credit and result in them not being able to obtain favorable loan terms in the future.

Importantly, negotiating with a lender for a modification of a loan can often be a complicated and overwhelming process for many borrowers. As such, experienced loan modification lawyers or loan modification attorneys are paramount. Attorneys who handle loan modifications may also be referred to as debt relief attorneys. They will have experience in negotiating favorable terms for their clients when a loan modification is an appropriate remedy for the borrower.

Does Everyone Qualify for a Loan Modification?

In short, most individuals will qualify for a loan modification. Any homeowner that has a high mortgage debt-to-income ratio or any individual that has a loan that is considered “underwater” (i.e., a loan balance that is higher than the current market value of the item or real estate subject to the loan) may be eligible for a loan modification. However, if the borrower has purposely been not making payments that they could otherwise make, then loan modification may not be available to them.

When reviewing whether or not an individual qualifies for loan modification, certain documentation is often required. Documentation that may be asked for in a loan modification request may include:

  • Application: Submission of a formal loan modification application is often required to begin the loan modification process;
  • Financial Documents: Pay stubs, financial statements, proof of income, bank statements, and tax returns may all be requested by the lender when considering a loan modification;
  • Other Documents: Other documents that may be requested are documents pertaining to why the individual was unable to keep up with the current terms of their loan, such as a hardship statement or letter from their current or former employer.

How Do I Ask for a Loan Modification?

Although the exact process for modifying a loan may differ depending on the terms of the current contract, the following is a list of events that typically happen in a loan modification:

  • The borrower gathers all of their financial documentation and determines whether or not loan modification is an option to assist them with their current loan.
    • In doing this, the borrower will typically make the determination as to whether or not they need a short-term or long-term solution to their current loan;
  • The borrower will then typically contact their lender or loan servicer and ask for a loan modification application; and
  • The borrower will then fill out the loan modification application and provide any requested financial documentation or other documentation that would support their application.
    • If the borrower is then denied, they may still be able to seek a loan modification prior to a foreclosure occurring;
    • If the borrower is approved, the loan will be modified to the new terms that were negotiated and agreed upon by the borrower and lender.

It is important to note that modifying a loan will often require an extensive amount of paperwork. As such, a loan modification lawyer can assist borrowers in completing the application process. Additionally, a loan modification lawyer can advise the borrower as to their best legal options moving forward with the loan modification or handling their loans.

How Long Does It Take for a Loan Modification to Be Approved?

In short, it depends on the processes that are incorporated by the lender or servicer. In some cases, a lender will be able to streamline the modification process, and the loan modification may be able to occur within the week.

However, in other cases, the lender will require a period of time to review all of the documentation submitted by the borrower in order to make a determination of what new terms, if any, will be offered to the borrower. There may also be a trial period to see if the borrower can meet the new terms of the loan before the new terms become permanent. In general, a loan modification may take anywhere between 3 to 6 months.

What Happens After a Loan Modification Is Approved?

After a loan modification is approved, the borrower will then be subject to the new terms of the agreement that they entered into. Additionally, some lenders may report a loan modification as a debt settlement to the various credit bureaus, which may impact the borrower’s credit. As such, it is important to ask whether or not a lender or servicer will do so, as that could impact loan terms in the future.

What Are Alternatives to Loan Modification?

It is important to note that loan modification may not always be the best option for every borrower. The following is a list of alternatives to loan modifications:

  • Forbearance: As mentioned above, forbearance is a short-term solution in which the lender agrees to suspend or reduce a borrower’s payments for a temporary period of time. However, interest on the loan will continue to accrue during the forbearance period;
  • Refinance: Loan modification differs from refinancing because a loan modification occurs between the current loan servicer or lender. In contrast, refinancing can occur when the borrower seeks a new lender that has more favorable terms.
    • For example, if prevailing interest rates have fallen since the loan was initiated, and the borrower has strong credit, refinancing may help lower the current loan payments;
  • Short Sale: A short sale applies to home loans and involves selling the home when the mortgage is more than the home’s value. This only lessens the amount of debt that may continue to accumulate from missing payments on the loan; and/or
  • Deed in Lieu of Foreclosure: A deed in lieu of foreclosure is a last resort where the homeowner gives up the deed to their home in exchange for the lender releasing them from the terms of the loan and making loan payments. However, this allows for the borrower to avoid their credit being damaged or foreclosure from occurring.

Do I Need a Lawyer for Help With Loan Modifications?

As can be seen, loan modifications can often be a very helpful tool and option for both the borrower and the lender. Loan modifications often can help both the borrower and lender maintain a working contractual relationship. However, loan modifications can also be a source of many different legal disputes, such as disputes over contract terms or fraud.

As such, if you’ve been involved in any type of loan modification dispute, it is in your best interests to consult with a well-qualified mortgage lawyer. An experienced mortgage attorney can help provide you with legal guidance regarding loan modification. They can also represent you in court should any legal disputes arise during the modification process.

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