If your mortgage is underwater, you might be considering all of your options for dealing with debt. Obtaining a loan modification can sometimes help you get back on your feet. However, loan modifications are not available to every borrower, and they don’t always present the best solution even when available. Continue reading to learn about loan modifications and how to determine whether a loan modification is in your best interests. Call a seasoned Ventura debt relief and bankruptcy attorney for help exploring your debt relief options in Southern California, including applying for a loan modification as part of a bankruptcy proceeding.
What is a Loan Modification?
With a loan modification, you keep your original loan (often a mortgage), but the lender agrees to change the terms. The lender might agree to change from a fixed to a variable interest rate, for example, or the reverse. They may extend the loan term, reduce the monthly interest rate, or otherwise adjust the terms.
Although it may seem counterintuitive for a lender to give you more favorable terms and, in doing so, collect less money, lenders have an incentive to do so. If you default on a loan and wind up in bankruptcy, for example, the lender gets nothing. It’s better for them to find a way to allow you to continue paying. Even if they have collateral–such as your home for a mortgage–the foreclosure and sale process is time-consuming and expensive. It’s often easier and more advantageous for all parties if they can adjust the terms to keep you paying.
Should I Get a Loan Modification?
Although loan modifications can be extremely helpful, not everyone should or even can get one. First of all, loan modifications are not always available. Focusing on mortgages: Typically, the mortgage must be delinquent for at least 60 days and be in imminent danger of default. The borrower must also demonstrate financial hardship, such as loss of a job or spouse, medical issues, or lack of capacity to repay.
If you do qualify, there are pros and cons to loan modification. The primary advantage of a loan modification is to allow you to get back out of default and continue with your mortgage payments. You can get a lower monthly premium, a better interest rate, and more time to repay. If you are facing default, a loan modification may be your best option for staying afloat.
There are, however, drawbacks. A loan modification may extend the term of your loan, but that also means you may pay more overall. Interest continues to accrue for that time. Moreover, if you switch from variable to fixed interest rate (or the reverse), you might wind up paying a higher interest rate a few years down the line.
Obtaining a loan modification can also hurt your credit. It will show up on your credit report, and it may lower your credit score, which can affect your ability to get another loan in the future. Loan modifications are also complex, time-consuming, and carry the risk of scams. It’s important to weigh all your options.
Ultimately, a loan modification may be in your best interest if the downsides and the risks are outweighed by the benefits. A loan modification may be your best way to save your home, which is worth taking a hit to your credit and paying more interest in the long term. Several loan modification programs may be available to bankruptcy filers, and an experienced bankruptcy attorney can help you determine whether you would benefit from seeking a loan modification within your bankruptcy case or if bankruptcy alone is a better solution.
Find Financial Freedom With Help From a Seasoned Southern California Debt Relief Attorney
If you are dealing with mounting debt and considering debt relief options including loan modifications and bankruptcy, please contact Rounds & Sutter for a free, confidential consultation. With offices in Ventura, Santa Barbara and Westlake Village, we represent clients throughout Southern California, offering sensible, compassionate legal counsel in the face of life’s challenges.
By Rounds & Sutter LLP | Posted on August 23, 2022
