Loan Modifications 101
According to the U.S. Department of Housing and Urban Development, a loan modification is a permanent change in one or more of the terms of a loan that allows the loan to be reinstated at a lower payment that the borrower can afford. Obtaining a loan modification isn't easy; many people lost houses due to foreclosures in recent history, and only some were able to get assistance through a loan modification.
A loan modification is not the same as a refinancing a loan. With a refinance, you usually get a new loan with a better interest rate than you had before. Generally, to refinance, you'll need to have good credit. Loan modifications are typically used by people who are having problems making their existing loan payments and whose credit isn't good enough to refinance. Keep your eyes on the fine print so you'll know what you're getting into before choosing either.
Applying for a Loan Modification
You'll never get a loan modification if you don't apply for one, and applying means more than just completing the paperwork. You'll also need to submit up-to-date backup documentation. This includes paycheck stubs, a hardship letter, a personal financial budget and any other documents the loan servicer requests.
If you are short even one document, you may lose your place in the application line. That's why it's wise to ask questions and then more questions until you are sure you know exactly what documents you must provide with your application.
Jumping Through Hoops
You’ve submitted it all — the paycheck stubs, the hardship letter, and other requested documents. Then, hypothetically, you get a letter asking you to resubmit your paperwork. It isn't fair or professional of the loan servicer, but just do it. You are at the loan company's beck and call, and you hope your loan will be modified if you jump through whatever hoops they present.
At the same time, be proactive. Call regularly to check on your application's progress. In fact, experts at Bankrate suggest calling every week to make sure things are on track.
Expecting Frustration and Confusion
Loan modification applications and agreements lean heavily on legalese, so just trying to understand the new deal you are getting can be incredibly frustrating. The loan company holds all of the cards, and you unfortunately hold none. So you aren't likely to achieve clarity about the terms and conditions unless you hire a lawyer to review the document and explain it to you.
Nor are you likely to come out on top. The creditor usually gets the better deal out of a loan modification, and you'll probably get a worse one, albeit with payments you can afford.