Understanding the Loan Modification Process

The loan modification process is a legal maneuver of contract negotiation. Very few individuals will really understand what is happening when their loan is effectively modified. There are some elements, though, that everyone should understand about what it means to change the terms of your loan.

When Modification can be Pursued

The first thing to understand about loan modification is it is not a blanket option for every person tied up in a loan. Actually, lenders do not look favorably on any modification. It takes them time, costs them resources, and typically means a loss of some potential profit. As such, they will only grant requests to modify in very rare situations. Lenders will extend the option to: one, borrowers who cannot afford their loans at the given price; two, borrowers who show their loans are no longer competitive on the market and could refinance the loan easily through an outside source. In both of these situations, lenders will lose more money by refusing the modification and will likely be willing to negotiate.

Altering a Credit Report

Modifying a loan is actually breaking the original terms of a contract. As such, the lender may report the change to the credit bureaus. The best way to avoid this is to make sure you are directly working with your lender and not involving a third party lender. If you take a new loan from a third party to pay off the existing debt, the primary lender will report you. However, if you can agree to a restructuring independent of a new loan, you have a better chance of the change going unnoticed on your credit report.

Arranging New Terms

Most people know the important terms of a contract: interest rate, monthly payment and limits. However, there are other essential terms to be aware of in a modification, starting with the modification fees. You should be aware of any fees you will be charged to change your contract, including any loan origination that may be assessed if a new contract is drawn. You should also be on the lookout for increased fees on any future modification. The lender will be afraid you will seek a similar change in the future, and the lender may build in high fees to your contract at this point.

Creating or Amending a Contract

When your lender and you do agree to change your loan, the agreement represents either an amendment to a legal contract or a totally new contract. As such, the process is governed by the contract laws in the state where you are taking the loan. This means the contract must follow certain guidelines, and it must be able to hold up in a court of law. It is particularly important to be wary of this fact if you are going through the process alone, without the assistance of a financial adviser. When you get to the point of amending a contract, it may be best to send along the changes to a lawyer for review. Lawyers are experienced in assuring all the necessary verbiage of a contract is fulfilled.