Loan Modification: 6 Tips to Increase Your Chances

Loan modification is the process of permanently changing the terms of a loan. It is used by borrowers, mostly home owners, who can no longer make payments on time but who also want to avoid default. Usually the borrower asks the lender to change the period of time that the loan exists for or the monthly interest rate on the loan. Increasing the time of the loan and/or decreasing the monthly interest rate owed on the loan make monthly payments more affordable. Because the lender must approve loan modification, and also because securing new terms may mean the difference between remaining a responsible borrower or suffering severe credit damage and monetary penalties, a borrower should know how to best increase his/her chances of being granted loan modification. 

Tip 1: Know the Process

The process of loan modification is straight forward and therefore should be precisely followed.  The borrower should be familiar with his or her specific lender's loan modification policy before the loan is ever closed. Although every lender is different, all lenders have established loan modification practices. 

Tip 2:  Be Early

A borrower needs to prove his/her worth to the lender. Instead of simply making late payments or not making payments at all, the borrower should notify the lender before the payment is due that he or she will not be able to make the payment. By contacting the lender early the borrower shows that he or she is conscientious and aware of his or her finances. If the borrower does not contact the lender early, when the borrower finally applies for loan modification he or she must clarify specifically when the financial troubles started.     

Tip 3: Complete All Paperwork Accurately

A lender needs to see a borrower's record of finances before loan modification will be approved.  The borrower needs to collect all of his/her expense, income, and cash flow records.  The amount and type of paperwork required varies between lenders but all lenders look down upon paperwork that is partially completed or inaccurate.  Faulty paperwork means that the lender needs to contact the borrower, send back the paperwork, wait for the new paperwork, and review the new paperwork.  The less work that the borrower forces the lender to do the better.    

Tip 4: Make a Request

Because the borrower will be submitting a package of material to the lender, the borrower should include a top sheet (or cover letter) as the first page of the materials. In this first page the borrower needs to specifically request the new terms that he or she is requesting. This means that the borrower needs to prepare these terms before even applying for modification.   

Tip 5:  Write a Good Hardship Letter

A hardship letter is the borrower's opportunity to explain the reason that he/she can no longer make payments to the lender. The hardship letter should be factual, not emotional. It should not attempt to convince the lender of who is at fault, why someone got fired from a job, or any other issue not directly related to an inability to pay. Acceptable hardships are job loss, death, illness, or some other unforeseen monumental event. The hardship letter must also contain an explanation of how the borrower will meet the new terms of the loan. The borrower must show that he/she fully intends to make payments on time and, due to the newly arranged terms, will be able to do so. 

Tip 6:  Predict the Future

The borrower needs to guarantee that he/she will make payments in the future. The borrower needs to explain how his/her finances and cash flow will improve, how long he or she expects that it will take to get back on track, and how he/she will avoid hardship in the future. Overall, the borrower needs to show that he/she is and will be a responsible, reliable, low risk customer. 

 

 

Keyword(s): loan modification