How to Negotiate a Loan Modification with your Lender

A loan modification can be a lifesaver.  It can be the difference between losing your property and keeping it.  It can be particularly effective if you just need a “little help” to get over a hump.

What is a Loan Modification and why would you want one?

A Loan Modification is when the bank is willing to renegotiate the terms of your loan to help you to be able to afford payments.  They may reduce the interest percentage for you, redo the way the loan is structured or extend it.  The ultimate goal is for your monthly payments to come down to a point where you can afford to make payments.

Why would the bank be willing to accept less money in a loan modification?

The main reason is that it costs a bank a lot of money to foreclose.   Not only that but with a poor real estate market they may never get what the house is “worth” by their original loan to you.  If it can be worked out that the bank loses less money by charging you less than they would by foreclosing they are often willing to do this.

Tips for a loan modification with your lender.

Learn all about your income to debt ratio.  Collect paperwork on all the bills and debts you have.  You need to have all of your financial records on hand.

Try to cut costs and document what costs you have cut and how much you need to get by after cost cutting.

You need to be in contact with your lender before they send you paperwork that you have defaulted.  This is a huge show of “good faith”.  They will see it as you wanting to pay them.  This will encourage them to want to help you through the tough times.

Draft an official hardship letter.  Include all the financial details.  Be honest.  Your income, your debt, your costs and your cutbacks, tell them everything.   I will repeat :  It is essential to be completely honest.  Send the letter through certified mail for proof that they received it.

Call and keep in constant contact with the bank’s loan modification officer.  Keep track of times and names of the people you are talking to.  It is a frustrating situation but make sure that you are pleasant to these people, to a certain degree their decisions can be judgment calls, do not give them reasons to judge against you.

You must seem and be able to pay the modified amount.  If the bank lowers your interest rate and extends the length of your loan but you still will not be able to make payments they will not want to make the deal.  You need to have enough income that you can make the modified payments.

Seek help and advice of a professional.  This can be a tricky and thorny situation.  If you can, get professional financial assistance from a professional.  They can help to steer you away from any issues that arise.

The real secret in this situation is to be proactive.  By doing this you make it clear that your intentions are in the right place and the bank will want to help you.