Any alternative to bankruptcy or foreclosure can seem like a positive move for someone struggling with mortgage debt. A loan modification is one avenue debtors can pursue. It has some advantages, but also some disadvantages. Debtors should consider talking with a bankruptcy or foreclosure attorney to determine if modifying a loan would be the right step.
What Is Loan Modification?
When a debtor has difficulty paying debts, they can try and negotiate with the lender to change the terms of the loan to make paying the loan back more feasible. There are various ways to modify a loan: The lender can reduce the interest rate or switch from a variable to a fixed interest rate; they can extend the term of repayment, which could help lower monthly payments; they may even have other types of loans that would work better.
How Do I Qualify for Loan Modification?
The lender looks at several variables, varying from lender to lender. They’ll look at their own guidelines and the type of loan. They’ll also look at the amount still owned, the property that is the collateral to the loan, and its specific features. Then the debtor must prove three things:
- The residential property is the debtor’s primary residence.
- The debtor is facing financial hardship, which includes medical crises that make them unable to work, job loss, divorce, or other hardships.
- The debtor still receives enough monthly income to manage to pay the modified loan payments.
Once the debtor has qualified under those terms, they’ll likely need to go into a three-month trial period to see if they can make the payments on time for that period.
What Are the Pros of Loan Modification?
There are definitely pros to loan modification. Depending on the negotiation and the lender, the debtor might see the following benefits:
- Lower payments. This is especially beneficial for someone who’s experienced a decline in income.
- Lower interest rates, or a change from variable to fixed. Lowering interest rates helps reduce the overall cost of the loan, especially if the term of the loan is extended. A fixed-rate provides a higher level of confidence that the payments won’t change if a variable rate of interest suddenly increases.
- Not having foreclosure or bankruptcy on a credit report. While loan modification will hurt credit reports, it’s not as much as having foreclosure or bankruptcy on the report would do.
What Are the Cons of Loan Modification
Loan modification also has cons, which can include:
A longer loan term, especially with reduced payments, could mean that the debtor will pay more in the long run. If this means the debtor can save their home, it might be worth it, but for other types of loans, it may not.
While the impact on the credit report isn’t as severe as bankruptcy or foreclosure, there is still a negative impact.
If the loan modification involves some part of the loan being forgiven, there may be a tax liability on the forgiven portion.
Let Us Advise You
If you or someone you know is interested in the loan modification to avoid bankruptcy or foreclosure, call us at 708-575-1500 to work with one of our experienced bankruptcy and foreclosure attorneys.