How Do You Qualify for a Loan Modification?

A loan modification can help if you’ve fallen behind on mortgage payments or are in danger of foreclosure on your home. Although this can be a beneficial solution in times of financial struggle, qualifying for a mortgage loan modification can be difficult. It often requires the help of a loan modification attorney. Here’s a look at how the process works and what you need to qualify for relief.

What Is a Loan Modification?

A loan or mortgage modification is a relief plan that changes the terms of your existing loan. The result is a lower monthly payment via a reduction in the interest rate, an extension of the repayment period, or conversion from an adjustable to a fixed interest rate. Payments may be suspended or reduced temporarily (forbearance). The principle of the loan, in rare cases, may be reduced, or the lender can suggest refinancing your mortgage if you have sufficient assets.

Loan modification can help you afford to continue your obligations despite changes in your financial situation. The lender requalifies you for your current mortgage. However, most lenders require you to miss at least one payment before considering you for a modification. The Home Affordable Modification Program (HAMP) does not require you to be delinquent on your mortgage to qualify, although many lenders use their own standards instead.

How to Qualify

To pursue a loan modification, attorney fees are often a factor. Not every lender is as open to the idea as homeowners would wish. In general, to qualify for a loan modification, the following are required:

  1. Proof of Primary Residence: You must prove the property is your residence to qualify for a HAMP modification. In most other cases, you need to live in the home to be approved for a mortgage loan modification. However, lenders may be more flexible with private property. For example, they may agree to modify a loan on a rental property that produces enough income. Another exception is modifying a loan on a second home if the lender feels that foreclosure would incur a major loss.
  2. Financial Hardship: You typically need proof of financial hardship. Even if you feel financially stressed, you won’t be approved for modification if the bank determines you’re still able to make payments. This is why lenders often require you to be in default to qualify. Typically, lenders require debt payments to exceed 41% of your gross monthly income (mortgage payments must exceed 31%) to consider you for a loan modification. The type of debt you have is a factor as well.
  3. Debt-to-Income Ratio: A high debt-to-income ratio means the amount of debt you owe is high relative to what you earn. It can show you are unable to afford even a modified mortgage. This is an important way of assessing your financial situation. If you have a lot of debt relative to income, speak to a financial advisor or mortgage lawyer near you about how to proceed and possibly increase your chances of loan modification approval.
  4. Show Ability to Handle Modified Payment Schedule: While you must show you don’t have the cash reserves to continue with current payments, a lender isn’t going to go approving a loan modification if you’re still likely to default. You won’t qualify if you are unemployed unless your spouse has a job. Whatever the case, you need to document your income with pay stubs or W-2’s, bank statements, tax returns, or, if self-employed, profit-and-loss statements. Secondary sources of income count as well if you’re using them to pay your mortgage.

Contact OakTree Law

OakTree Law offers legal options to homeowners in Los Angeles or Orange County who are struggling to meet mortgage payments. Our loan modification attorney can find relief from financial hardships, foreclosure, and stress. We’ll help you understand the options and take steps towards a more secure financial future. Browse our resources and OakTree Law reviews to learn more, request a free evaluation online, or call 888-348-2609 today.