Essentially a loan modification is a process by which an existing mortgage loan is renegotiated and restructured. A few possible ways for a loan to be restructured include:
- Reducing or freezing interest rates for adjustable loans
- Reducing principal balance
- Reducing late fees or other penalties
- Lengthening terms of a loan
- Capping monthly payments
Whatever the agreement, loan modifications are a permanent change to your loan. Many lenders will be willing to consider such a change as it can create a win-win solution. First, you will not be overwhelmed by debt, and second, they will not have to lose money through the foreclosure process. Furthermore, they will once again have a consistent asset.
A loan modification is one of the best options available to you. It will not hurt your credit score and it will allow you to stay in your home. In general, it makes your mortgage more manageable. If you do decide to request a modification, you most likely will have to provide your lender with your most recent bank statements, tax returns from the last 2 years, and paycheck stubs. This will show your lender how much income you are making and why you need such a modification. When a homeowner has fallen on hard times, it is often more likely that a lender will be more willing to consider a change and approve a modification.