How to Apply For a Loan Modification
Written by: Kristy Welsh
Last Updated: August 10, 2017
A loan modification can offer plenty of benefits for anyone struggling with financial obligations. When a bank considers modifying the original conditions of the mortgage loan, they can also create a way to stop your home from going into foreclosure. After all, if the bank agrees to work with you to find a more affordable way for you to get back on track financially, then they're not making moves to take your home.
Not only is it possible to get your mortgage payments reduced with a successful loan modification, but you may even get your bank to agree to reducing your interest charges and waiving some of your penalty fees too.
Loan Modification Application
Most banks and lenders require that you submit your application for a loan modification in writing. This is called a letter of hardship and should include your reasons for being in such financial difficulty, as well as your request for a modification to your existing loan to help ease the pressure while you get back on your feet.
The unfortunate part about this requirement is that the majority of people who attempt to write their own hardship letter get the basics wrong. This can mean your application is declined and people can frequently find their bank unwilling to help them at a time when they need it most.
Banks can be much easier to negotiate with than most people believe. After all, if they can help you catch up your delinquent payments and get back on the right track, they get to keep a customer that keeps paying them interest. Banks really don't want to take your house, but they do want to know that you're going to pay back the money you borrowed from them eventually.
Writing a Hardship Letter
Before you sit down to write your modification request, you will need to think about what you want to ask the bank to do for you. Most people believe that telling the bank all about how difficult their situation is and how hard it is to find a job in this economic climate will help the bank feel more sympathy for their situation.
Unfortunately, the banks aren't in business to feel sympathy. They're in business to lend you money that you promised to pay back to them when you signed your credit contract. That's how they make their profits and pay their own staff. Keep this in mind when you fill a loan modification letter with a spiel about how upset you are about losing your home or how you were made redundant for your job and can't find new work. They simply don't want to hear it.
The bank's loan mitigation officer only wants to know what your plan is to get back on your feet financially. This means you should work out a clear and rational plan for what you're going to do about catching up your overdue payments. If the person reading your modification letter can see that you're trying hard to find a realistic solution to getting back on your feet, they're more likely to approve your application.
How Much Modification Do You Need?
You can't write a hardship letter asking the bank to modify your loan if you don't specify how much modification you need. If your financial situation has changed and your income is much lower than it used to be, then you'll need to write out an accurate budget.
Write down all of the income coming into the household each month and then make a list of your current monthly expenses. Tally up the figure at the bottom and make a note of how little you have left over each month to pay for living expenses and other necessities.
Then write a second list of expenses, showing a lower mortgage payment amount and tally up the new figure. This should show the bank that approving a loan modification request could be exactly what you need to help get you back on track again.
Writing a Loan Modification Letter
Once you have thought through your plan to catch up your past due payments and created a budget showing how a loan modification can help you, it's time to write your letter.
Remember, the bank's loss mitigation officer receives a lot of calls and letters from upset, hurt, angry customers every day who are not being rational about helping themselves. You don't want to be one of those customers. Keep your writing tone light and positive and you'll find that the staff member will be far happier to deal with you than with the less-friendly customers.
No matter how bad you think your financial situation is right now, always remember to point out to the bank that it's a temporary problem and you're doing everything in your power to put it right. They want to know that you're looking for any ways at all to bring in some income and meet your financial obligations until you can find a replacement job.
If you can keep your application letter positive and make it very clear how and why a loan modification will be beneficial to your current situation, then you stand a much better chance of having your application accepted.