How to Get Approved for a Loan Modification If You Are Unemployed

Loan modification is the process of renegotiating your loan terms for a more favorable contract. Some people seek modification to reduce the expense of their loan overall. Others would like to modify so their loan is more affordable in the short-term, even if the overall expense is higher. Most people who suffer unemployment are seeking modification for this second reason. Luckily, lenders will look to mitigate losses and may encourage you to modify under these circumstances.

Writing a Hardship Letter

The first step to take is to attempt modification with your lender directly. The most common way to do this is to write a hardship letter. A hardship letter explains why you need to modify the loan based on three primary criteria:

  1. You made a good faith effort to pay your loan in the past. This means you did not miss payments prior to your emergency; in your case, this emergency is unemployment.
  2. You have a pressing financial emergency that is preventing you from continuing to make payments. The most common emergencies are illness and job loss, so you should qualify if you lose your job.
  3. The emergency will continue for an indefinite period of time. If you just lost your job today, you may not be approved for a modification. You should show there is a good chance you will be out of a job for an extended period, for example, industry layoffs, high unemployment in your area and other market factors.

Proving Circumstances of Hardship

You will need to prove the circumstances you described in your hardship letter. If you are receiving unemployment, an unemployment check should prove the situation occurred. Usually, it helps if the reason for your termination was outside of your control. If you were terminated for performance-related reasons, your lender may fear you will have a harder time getting a job in the future. Lenders may determine it will be cheaper to allow you to default now than in the future. You will have to show you can guarantee against a future default if the loan is modified.

Avoiding Default

Your hardship letter and negotiations should show you will be able to continue to meet the requirements of the loan after the modification. If you have savings, assets or even another revenue stream, the lender will be more likely to believe you can pay the loan off eventually. Understand: you will likely end up paying more in the long-run if you modify your loan terms for lower monthly payments. Expect the lender to assess fees and other expenses.

Third Party Modification

If your lender refuses your modification, you may try to get a new loan in order to pay off the existing debt. Sourcing the new loan according to more favorable terms allows for a third party modification. Unfortunately, an unemployed person will have a harder time getting a new loan in the sum needed than getting the existing lender to modify in most situations. The existing lender already has a stake in your loan and will want to work to keep you from defaulting; a new lender can just turn you down at no loss.