Loan Modification FAQ

Homeowners have several questions when facing foreclosure. Below are answers to common loan modification questions:

Q. Will loan modification stop foreclosure?
A. Yes. A loan modification modifies the original terms of a loan, usually by lowering the interest rate. The lender must agree to modify the terms of the original contract, which many will do, since foreclosure is an expensive process for the lender and the lender would prefer a lower monthly payment than no payment at all.

Q. Will loan modification lower my credit score?
A. No. A loan modification is an adjustment of a contract agreed to by both parties. When both parties agree, neither party can be penalized. The fact that payments have been missed, however, will lower a credit score.

Q. My loan was in default prior to my loan modification being approved, how much will my credit score drop?
A. This depends on several factors that include the amount of the loan in default and the amount of time the loan was in default prior to the request for a loan modification was approved.

Q. My loan modification was approved, when will my credit score begin to improve?
A. As soon as your first payment is made on time. By making the new lower payments on time and in full your credit score will begin to improve little by little. Keep current with your new monthly payments and you’ll have no trouble improving your score over time.

Q. Should I hire a loan modification company or an attorney to negotiate with my lender?
A. An attorney is a much safer and more reliable bet. Assuming a loan modification company is legitimate, there is only so much they can do. Attorneys will not only negotiate with lenders but will also represent their clients in court if it gets to that point, which loan modification consultants can’t do.

Q. Some states tax individuals who are approved for short sales, will I be taxed if I am approved for a loan modification?
A. No. A loan modification is simply the modification of a contract. Lenders don’t usually lose money on a loan modification like they do on a short sale. A short sale forgives a portion of a loan (which some states see as income), but a loan modification allows lenders recover the full amount of their loan through lower monthly payments from the borrower.

Q. Can I negotiate a loan modification by myself?
A. Legally, yes, but it usually isn’t a wise decision. Lenders know that few clients have the legal knowledge necessary to effectively negotiate a loan modification plan and have no problem taking advantage of that lack of legal knowledge.

Q. My lender denied my request to modify my loan…what now?
A. Don’t worry, not all hope is lost. Once a lender has denied a request to modify a loan the borrower has several options including mortgage litigation, a short sale, bankruptcy, or a deed in lieu of foreclosure. Each option holds different risks and consequences. Depending on a person’s exact financial situation, some options will be better than others. Research all of your options to make an informed decision.

Q. I still have questions about my loan modification, who should I ask?
A. A loan modification falls under the scope of contract and real estate law. Ask a local attorney who specializes in real estate, finance, and / or contract law for guidance. Many will even provide answers to simple questions over the phone for free. If your case is more complex than usual, a face to face consultation may be more appropriate.