Loan modification: how it works

Loan modification refers to the modification made to the interest rate, terms and tenure of an existing loan. If you as a borrower face long-term inability to pay back a loan, then you can apply for loan modification. Through loan modification, you can get an extension on the loan tenure, can change the type of the loan and can even get the advantage of a reduced rate of interest. As a whole, loan modification makes your loan repayment much affordable so that you can successfully repay the loan without defaulting. But before going for loan modification, you need to know the whole process i.e. how the loan modification works.

How the loan modification Works

• When you apply for loan modification, most of the lenders will ask you to present a financial statement. So, it is better for you to prepare a detailed financial statement well in advance. For preparing the financial statement, you are first required to list down your expenses on daily necessities, expenses on credit cards and other financial obligations and then you should calculate the average cost on each item. Your financial statement should cover those months for which you have defaulted on making loan payments.

• Along with the financial statement, you are also required to write a Hardship Letter. This letter will clearly state, why you are not able to make the usual loan payments and why you want a loan modification.

• When you request for loan modification, your lender will ask for certain documents for reviewing. These documents are Bank statements of last two months, the most recent loan statement, property tax statements and document showing whether you are an employee or a self-employed person.

• If your lender finds you eligible for loan modification, he will send you an information brochure and a financial worksheet. You need to submit your expenses on the worksheet and also need to attach the documents that are required for reviewing your financial status.

• After reviewing all the documents, if the lender finds that you will be able to repay the loan after loan modification, then at first he will verbally agree for loan modification and then will send you the loan modification Offer Document.

• If you accept the loan modification Offer, then you are provided with a stop gap repayment plan, which will remain in force till the loan modification goes through. This stop gap repayment plan can continue for maximum 60 days and within these 60 days, you are required to prove that you can manage the monthly loan payments besides your other expenses after the loan modification.