What is a loan modification?
When homeowners purchase a home they sign a contract called a note. Homeowners also sign a mortgage which secures the mortgage, in case of default, against the home as collateral. A mortgage loan modification is a change in your
loan terms with your mortgage lender. A loan modification may reduce your monthly payment to an amount you can afford. Loan modifications may involve extending the number of years you have to repay the loan, reducing your interest rate, and/or, in rare cases, reducing your principal balance. In either case, a lender must agree to voluntarily modify the terms of the mortgage.
The essential benefits of a loan modification are as follows:
How does bankruptcy help?
Typically when a homeowner files for bankruptcy a lender is temporarily stopped from attempting to collect on missed payments or moving forward with the foreclosure process. Bankruptcy stops any pending foreclosure or collection actions against the homeowner or Debtor. Bankruptcy gives time to homeowners and helps homeowners address their outstanding debts and gives homeowners a framework to pay back missed payments, modify secure debt on their property, and take other action to reorganize their finances.
One of the biggest benefits of applying for a mortgage loan modification while in bankruptcy is that a homeowner can “clean up” their other debt issues; consequently, making their financial situation more appealing to the lender reviewing the application for a loan modification.
Another benefit of applying for a mortgage loan modification in Bankruptcy Court is oversight. While you cannot force a lender to grant you a loan modification; you can make sure that the lender properly reviews the application to make sure they explore all government and internal programs available to see if the homeowner qualifies for a loan modification.
This structure is a great benefit to all parties, and ensures that the parties engage in the process in a timely manner and in good faith. If and when a lender offers a modification, the homeowner must move before the bankruptcy court for authorization to enter into the modification with the lender. This process grants transparency to all parties involved in the process, and further ensures that the homeowner remains in control of their home.
How does a loan modification work?
A homeowner must generally make an application for a mortgage loan modification. This application will normally request the homeowner’s personal financial information, including their household income, expenses, and debts. Homeowners should be prepared to transmit copies of their pay stubs, bank statements, tax returns, contribution letters, appraisals, and other proofs required by the lender. This process can be very time consuming and requires attention to detail. This application may also require statements by the homeowner explaining the reason for their missed payments, and explaining the other hardships that require their application for a modification. This application process can take weeks or months to complete depending on the lender, and depending on the diligence of the homeowner. A mortgage loan modification may be granted on a trial basis, and may require the homeowner to make a series of trial mortgage loan modification payments over three (3) or more months in order to prove to the lender that the payments are affordable and that the homeowner intends to follow through with the modification.
If an application is denied, there may be an opportunity for the homeowner to appeal the decision. However, because a mortgage loan modification is a voluntary process, lenders cannot be forced to grant a modification. If a lender does grant the application, and the homeowner obtains a loan modification, the loan is considered up to date and no longer headed into foreclosure, or in active foreclosure, as long as the homeowner continues to abide by the terms of the modification.
What if a homeowner in Bankruptcy is denied a loan modification?
Another benefit of a reorganization bankruptcy for a homeowner is that they may have multiple ways to fix their mortgage problem through their case. A homeowner cannot solely rely upon loss mitigation to cure their missed payments and to bring their mortgage current with their lender. If the homeowner is denied for a loan modification the homeowner may use their Chapter 13 Plan of reorganization to pay back missed payments over the life of their plan of reorganization. In addition, a homeowner may apply to the Bankruptcy Court for approval to obtain lending to refinance the old mortgage.
If neither option is viable then a homeowner can move for bankruptcy court approval to sell the home on their own timeframe and cash out any equity the homeowner may have built up in their home over the years. Consequently, a homeowner is given a reasonable amount of time to take multiple steps to save their home without the pressure of a looming foreclosure sale.