When considering possible actions to avoid defaulting on your loan, a loan modification can be a great place to start. What is a loan modification? Should you even be thinking of getting one? The answer to that depends on your particular circumstances.
First, let us look at what a loan modification is before we can get into whether it’s a good or bad decision to get one.
What Is A Loan Modification?
A loan modification is an agreement with your lender to adjust the terms and conditions of your loan. Loan modifications are usually allowed on secured loans such as mortgage loans.
You may consider asking your lender to modify a loan if you face severe difficulty in servicing your loan. This may come from a permanent or long-term loss of income, loss of a spouse, and sudden sickness or disability, and among other circumstances.
There’s no one-size-fits-all regarding what the terms of a loan modification might look like. Your lender will look at your particular situation and decide which course of action is most fit. The possible measures available to you and your lender may include:
- Extending the life of your loan
- Adjusting your interest rates downwards
- Lowering your principal (they are likely to avoid this one except in exceptional circumstances).
The good thing is you don’t have to wait till you’ve defaulted on your loan for you to start applying for a modification. You may apply for one as soon as you’re faced with the danger of defaulting in the long term.
If you’re not a homeowner yet you’re asking yourself, ‘So what if I buy my house now and later on become unable to pay my monthly loan installment? We get that the fear of foreclosure is legitimate. Suddenly losing your home suddenly isn’t something anyone would look forward to. Your advantage, though, if you’re to find yourself unable to service your loan per the previously agreed terms, is that your lender can modify the terms as he/she hates foreclosure almost as much as you do.
It’s usually less costly on the lender’s part to negotiate new terms for your current loan than to initiate a foreclosure process. So, once you determine that you need to arrange for a loan modification, don’t be afraid to approach your lender and ask for it.
But now that you know what a loan modification is and the options available to you and your lender in your negotiations, let’s now look at the pros and cons of the agreement so that if you are to make a decision, it’ll be an informed one.
- You get to keep your home by avoiding foreclosure.
- You could resolve delinquency status if you weren’t paying your loan settlements in time.
- You may moderate your credit score’s damage by getting your loan modified instead of the enormous impact on your score that is most likely if you get your house foreclosed.
- Reduce monthly payments.
- Can change your mortgage from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. This might moderate the ballooning effect of keeping an ARM that has an increasing interest rate.
- Over time, even though a loan modification might lower your monthly payments, it might increase the overall amount due. The aggregate amount you pay to the bank might even surpass the actual value of the house.
- It might take longer to finish paying pay up the loan.
- Your principal might balloon from all the processing and legal fees associated with applying for a loan modification. Any back taxes, escrow, and late fees due will also be added to your principal.
- Some loan modification agreements will be reported as debt settlement, in which case they’ll show up on your credit score. Without a doubt, such history deals a heavy blow to your overall credit score.
- Your biggest goal might be to keep your home, but this isn’t guaranteed. Based on your lender’s assessment of your situation, they may encourage you to sell your house or, in some cases, deny your application and begin the process of foreclosure.
- After your loan has been modified, there’s still a chance you might miss a payment towards the loan. If you do, the bank might take you through a relatively expedited foreclosure process. They might be unwilling to negotiate further if you are defaulting on an already negotiated settlement.
So, Should You Get One?
As you might have already seen, getting your loan modified is by no means a clear win. You’ll have to carefully consider whether you really need a loan modification or need to pursue other options. Other options that you should consider include;
- Refinancing your loan when income loss is something you’re expecting, such as an income loss due to retirement. In this situation, you can take the opportunity to lower your interest rates by refinancing your loan.
- Mortgage forbearance is a viable option if you expect to gain back your regular income after some time. Your income loss might be due to an injury or other causes. In this case, you can approach your lender to have your obligations paused until a mutually agreed time.
- A short sell might be advisable if you’ve lost a spouse who had also been the breadwinner and can therefore no longer service your loan in time or at all. This will help you keep your credit score relatively clean and also avoid foreclosure.
So, if you’re facing or expecting to face difficulty in your loan payments, you can extend your considerations beyond asking for a loan modification.
You don’t want to go through the costly and time-consuming process of applying for a loan modification only to realize its disadvantages far outweigh its benefits for you. In a decision of this nature, nothing beats knowing your options and considering them equally.
In the end, all the disadvantages should be worth it. If taken only when necessary, a loan modification can ease the pressure exerted on you by monthly loan obligations while making sure you keep your home. And we hope you can keep your home!