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Loan
Modification Basics:
Loan modification relies on a credible reason for non-payment and a credible
ability to pay if the loan is adjusted. To qualify for a loan
modification, homeowners must first and foremost have a provable
hardship. Mortgage companies are interested in modifying the loan only as it
prevents them from losing money, the hardship shows them that the homeowner is likely to default, or fail to
meet the current payments. It will need to be documented with as many facts as
possible to support the need for a change. This is a very subjective process,
but absolutely necessary. There are some situations that may cause hardship, but
are not considered acceptable for a loan modification.
For example, quitting a job or reducing work hours is typically unacceptable.
This hardship is the explanation to the lender for the failure of the homeowner
to make the required payment. “I kept my payments up, but lost my job in July
and had to take a job with a smaller salary.” “My husband was injured and the
medical bills not covered by insurance created the situation for us.” Upon
establishing a reason for previous failure to pay, the issue becomes proving an
ability to pay with a modification.
The ability to pay is proven in much the same way a normal loan is approved.
It will involve documentation of income as well as assets and liabilities. The
issue for the lender is this—if the modification is approved, will the borrower
be able to remain current with the lower payments? If the modification won’t
solve the problem, it won’t be approved. In simple terms, the borrower needs to
show why there was a default and why the modification will prevent one in the
future.
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