Can a Loan Modification Stop Foreclosure?
Financial hardships are bad enough without the fear of losing your home. If you have difficulty making monthly payments, you may wonder whether a loan modification could prevent foreclosure. Depending on your situation, a loan modification could be helpful in lowering your payments and keeping your home.
What Is a Loan Modification?
A loan modification changes the terms and conditions of your mortgage and often lowers your payments – a crucial lifeline in times of financial strain. Loan modification can be done in various ways. The type of modification you qualify for will depend mainly on your financial situation and the lender’s policies.
It’s important to note that while modifying a loan can be hugely beneficial when facing foreclosure, not all borrowers will be eligible.
Advantages and Disadvantages of Loan Modification
There are various advantages and disadvantages of loan modifications. Some of the benefits are:
- Avoid foreclosure – Modifying your loan could make your mortgage payments more manageable, potentially allowing you to keep your home.
- Fixed interest rates – If your original loan has an adjustable interest rate, a modification could change it to a fixed interest rate. This creates more stability and predictability since your payment will no longer change with the market interest rate.
- Some disadvantages to a loan modification include:
- Fees and costs – Modifying your loan can come with substantial fees that can be challenging to pay if you are already in a difficult financial situation.
- Extended loan term – Sometimes, a modification will extend the loan term to lower your payment amount. However, this means you will be required to pay more in interest over the life of the loan.
- Eligibility – Loan modification is not available to every borrower, so it isn’t a guaranteed solution if you are worried about foreclosure.
Mortgage Loan Modification Options
There are several common types of loan modification options that banks might offer, including:
- Interest rate reduction – Reducing your interest rate can lower your monthly payment. An interest rate reduction may be temporary or permanent, depending on the conditions of the loan modification.
- Term extension – Extending the term to spread the remaining balance over a more extended period is another common modification. Spreading out the remaining balance can make your monthly payment more manageable.
- Principal forbearance – Sometimes, your lender will agree to put your loan’s principal balance in forbearance. This can reduce your payment for a specified period. But the forbearance amount must be repaid eventually.
- Capitalization of arrears – If you fall behind on your mortgage payments, your lender may allow you to pay the missed payments in arrears. This means that the missed payments will be added to your principal balance, allowing you to catch up on payments.
- Loan refinancing – In some cases, you could refinance your loan to get a lower monthly payment.
How to Get a Mortgage Loan Modification
To get a loan modification, you must inform your mortgage company that you are going through financial hardship and are seeking modification of your loan. The bank may request financial information such as bank statements, tax returns, and pay stubs. In some cases, the lender may also require a formal application for modification.
Can a Mortgage Loan Modification Be Done in Conjunction with a Chapter 13 Case?
Yes. The two things are not exclusive. That said, the bankruptcy filing may not necessarily help or hurt your modification efforts.
When is Bankruptcy a Good Consideration?
A Chapter 7 Bankruptcy or Chapter 13 Bankruptcy may allow a debtor to shed certain types of debts that will him or her to concentrate financial efforts on a mortgage loan. Also, if there are mortgage arrears and the loan modification is unavailable or undesirable then Chapter 13 Bankruptcy allows a debtor to stop foreclosure and have up until five years to bring current the arrears. Sasser Law Firm offers free consultations to review your available options. Our phone number is (919) 319-7400.
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For more than 20 years, the Sasser Law Firm has been helping individuals and business owners sort through financial hardships to see the light at the end of the tunnel. Our North Carolina bankruptcy attorneys are all board-certified specialists, which means we have passed a complex exam, undergone a thorough peer review, and continue to earn legal education credits in this ever-evolving area of law.