When a borrower is unable to meet the long-term commitment of the payment schedule and terms in the original loan agreement, those terms may be modified using a process called Loan Modification. Most often, a loan modification involves one or more of the following:
- Reduction of the principal balance, interest rate, or both
- A change in the type of loan
- Extending the length of repayment terms
There is a distinct difference between a forbearance agreement and a loan modification. The forbearance agreement is a short-term reprieve, intended for the individual facing a temporary hardship. The Loan Modification is a long-term solution that permanently revises a loan, intended for individuals lacking the capacity to repay.
LENDER’S MODIFICATION DECISION
Most often, the firm in possession of the loan does not initiate the Loan Modification offer. Instead, it is typically made by a loan servicing company, which is acting under a contract to the loan’s owner. The owner of a loan may be a private individual, or an investment group owning parts of a security, which is mortgage-backed and collateralized by a loan pool.
No matter who the owner of the loan may be, the servicing company has a contractual obligation to develop a solution for repayment problems, which minimizes financial loss for the loan’s owner. In most cases, a loan modification will be less costly than a foreclosure; therefore, the servicing company has an interest in developing such an agreement.
To be clear, this does not mean that a troubled borrower can expect the servicing company to initiate a loan modification deal, particularly a complex agreement that includes a pledge of future appreciation. This is due to the cultural climate of the loan servicing industry, which is discouraging to such deals that increase costs without generating additional revenue. Our firm will act as your advocate, helping to facilitate a loan modification allowing you to retain your home, with sensible repayment terms.
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