Loan Modification Could be a Viable Option for Unemployed Individuals

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Homeowners still paying their mortgage are on the brink of missing their monthly payments when they suddenly lose their jobs. Although mortgage interest rates have become favorable, borrowers who become unemployed could not possibly refinance their current mortgage simply because lenders will most likely not be able to verify that they have a stable source of income to repay the new loan. Their financial situation could be even more frustrating if borrowers don’t expect that they could land a job again anytime soon. Some struggling homeowners, however, may find loan modification a viable option to avoid foreclosure and keep their homes.

Important: The U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Finance Agency (FHFA) recently suspended evictions and foreclosures to keep people safe from the COVID-19 pandemic. Troubled borrowers must immediately contact their servicer and ask what relief options suit their situation.

Loan modification makes monthly payments affordable

The main objective of a loan modification is to make monthly payments permanently affordable for homeowners suffering from financial hardships and eventually help them keep their homes. This is worth considering especially for unemployed borrowers who have started accepting freelance work or side gigs to augment their finances while continuously looking for stable employment.

Through loan modification, lenders could agree either to reduce the interest rate, convert an adjustable-rate mortgage into a fixed-rate, extend the loan term and/or forbear some of the principal balance to make the monthly payments more comfortable for borrowers. Aside from helping homeowners to stay in their homes, many lenders could agree to modify a loan because it’s more cost-effective instead of putting a home into foreclosure. Generally, lenders don’t want to keep a foreclosed property.

What homeowners need to qualify for a loan modification?

Homeowners may ask their lenders for a loan modification if joblessness will likely result in mortgage default. Lenders also offer loan modification for borrowers who became disabled, those who lost a spouse, those who underwent divorce or those who are suffering from a serious illness that makes it impossible to repay their mortgage under the current terms.

Homeowners affected by COVID-19 who are not qualified for a loan modification should immediately ask their lenders or servicers what type of mortgage relief is available for them. Struggling homeowners could be eligible for a loan modification if they can prove to their lender that their home is their primary residence, they are going through a financial hardship, and they could continue making payments under a modified loan.

Homeowners who want to apply for a loan modification need to prepare their paperwork to support their application. Generally, lenders or servicers would require the latest bank statements, tax returns, financial worksheets, profit and loss statements, and an affidavit from the homeowner that he or she is experiencing financial hardship but will have the capability to continue making payments under a modified loan. Homeowners are often advised to immediately notify their servicers if they think mortgage delinquency is imminent.     

5 tips homeowners may consider when applying for a loan modification

Applying for a loan modification now could be difficult as servicers and lenders deal with a surge of borrowers seeking relief after being affected by COVID-19 on top of other valid reasons resulting in a serious financial loss. Struggling homeowners may consider these tips when applying for a loan modification:

1. Apply for a loan modification immediately – Homeowners should apply for a loan modification once they think that they would default on their mortgage. Homeowners will only worsen their situation if they would delay contacting their servicers.  

2. Prepare all the required paperwork – Homeowners need to prepare all supporting documents and submit a complete application as required by the servicer. When submitting documents, it’s important for the homeowner to make sure that everything in the documents is readable and without any erasures. Homeowners should also ensure to submit the application form without omitting any page.

3. Keep all the correspondence from the servicer – When applying for a loan modification, homeowners may find it ideal to keep all the written communications they received from their servicer. Keeping records could help homeowners if their servicer mistakenly put the home into foreclosure.

4. Ask questions – It’s critical for homeowners to ask questions so they understand everything they need to know when applying for a loan modification. For example, homeowners need to clarify with their lenders all the documents they need to send together with the application form. Asking questions not only saves time, but it also prevents homeowners from making mistakes that could cost them their homes.

5. Be aware of the laws that protect homeowners – Like any other companies, mortgage servicers could also commit violations when processing loan modifications. Servicers, for example, should not advise homeowners that they have to be in default first before they could apply for a loan modification. Homeowners could file a complaint with the U.S. Consumer Financial Protection Bureau (CFPB) if they think their servicers have violated certain policies.  

Conclusion

Loan modification could be a viable option for homeowners who are likely to default with their mortgage payments because of unemployment or any other valid reasons. While not all borrowers could be eligible for a loan modification, struggling borrowers must immediately contact their servicer and ask what mortgage relief options are available to them.

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