How to Do a Loan Modification
If you are facing foreclosure on your home, there are many different options available to you. One of the first steps homeowners can take before considering bankruptcy, a short sale or simply walking away from the property, is a loan modification. Many banks are willing to work out new terms on a loan with a homeowner before a foreclosure occurs. With a loan modification, both parties come out on top, whereas with a foreclosure, everyone ends up losing.
Things You'll Need
- Income tax statements
- Bank statements
- Pay stubs
Gather your financial documents. Your bank will need to see a variety of documents before considering a loan modification. They will need to see two years worth of your income tax statements, as well as two months worth of your current bank statements. You may also want to provide pay stubs as well as any other documentation your bank may require.
Write your hardship letter. Your bank will need a concrete explanation of why you need your loan modified. Reasons for a hardship include getting laid off, having a pay cut at your job, becoming disabled or injured, having your property value decline suddenly or even a change in your relationship status which affects your ability to pay your mortgage. Essentially, you need to prove to the bank that you are no longer able to meet the original terms of the loan and back this up with concrete
Contact your bank. Get in touch with your loan officer or a personal banker at your current bank. Bring your documentation and your hardship letter. They will want to discuss your options and come to an agreement on what modifications will assist you in making your payments again. This needs to be done before you fall too far behind in your mortgage payments. Ideally, you should contact your bank immediately upon finding that your financial circumstances have changed. The sooner you contact them, the more likely you will be to get approved for a loan modification. Negotiate for a better interest rate or an extension of the loan term to bring your payments down to an amount that you can easily handle.
Wait for the bank's decision. Typically, a bank will go over the documentation that you provided along with your hardship letter and determine whether or not to grant the loan modification. This can take up to one month, depending on how often your bank's loan committee meets and how they prefer to handle modifications.
Make your new payments on time. Once you have a loan modification, you will need to be sure that you can make your payments on time every month. Banks will typically not agree to a second loan modification.
Tips and Warnings
- Your hardship letter should be clear and concise. Keep it to approximately one page and only state the facts.