A loan modification or loan mod is a permanent change in the terms of a loan which is designed to keep the borrower from going into default. Loan mods are classically used on mortgages for real estate, although people can also petition for modifications to other types of loans, such as car loans or student loans. Typically, loan modification involves retaining the current lender, and reissuing the loan once the modification is approved.
People usually apply for a loan mod because they are having difficulty making the payments. The chances of getting an application approved are greatly increased by approaching the lender before the loan goes into default with concerns about the terms of the loan, so that the modification can take place before the borrower is in bad standing with the lender. However, some lenders may agree to renegotiate the terms of the loan once a loan is already in default to avoid taking possession of the property in a foreclosure.
The goal of a loan mod is usually to reduce the monthly payments to a price which the borrower can afford. This can be accomplished by adjusting the interest rate, length of the loan, or even the balance. Loan mod programs are usually designed to bring the payments, including insurance and property taxes, down to a number below 35% of the borrower's monthly income. In order to accomplish this, the borrower will have to provide documentation of his or her income and proof of the hardships which make the payments unfeasible at their current level.
In the process of the application, the lender can request inspections of the property in addition to conducting credit checks and asking for supporting documentation from the borrower. Making a loan mod can take time, and it helps to establish a relationship with a loan officer for the duration of the application, to ensure that a contact at the lender's offices is familiar with the situation. Borrowers also need to keep up on current payments or request a grace period while the terms of the new loan are worked out, as defaulting on the existing loan can cause the lender to reject a loan modification application.
Borrowers who are having difficulty repaying their loans should contact their lenders sooner, rather than later. Many lenders are willing to work with borrowers who bring up potential issues before they develop into a problem, and the lender's staff can temporarily or permanently adjust the terms of a loan so that the borrower can stay current.
