Death in the family, illness, loss of a job, or divorce can take a great toll on our daily lives and finances. If tragedy strikes and you are unable to afford your monthly mortgage payments and find yourself falling behind, you may be able to modify your home loan to catch up and avoid foreclosure.
What Lenders Need to Know Before They Restructure a Loan
As a loan officer, you will have clients come to you for advice about restructuring their loan. Also known as loan modifications, restructuring a loan makes the current loan more affordable for the borrower and they can possibly avoid foreclosure.
Restructuring verses Refinancing
First, you must understand that restructuring a loan is not the same as refinancing a loan. When you refinance a loan, you are essentially creating a new loan for the borrower. Then, the new loan pays off the old one .On the other hand, restructuring a loan means the existing loan is kept, but modified for lower payments so a homeowner can afford to pay their monthly statements.
The Steps Involved in Restructuring a Loan
When you restructure a loan for a borrower, you are either:
- Changing the type of loan it is
- Extending the loan term
- Permanently or temporarily reducing the interest rate
- Adding past-due amounts to the unpaid principal balance to the new loan
When you have worked with the client to determine how they wish the loan to be restructured, you will then determine:
- The qualification of the borrower
- Whether or not the cost of restructuring the loan will exceed the cost of foreclosure
Borrowers Must Be Qualified
Before you restructure a loan for a client, you must determine if they are qualified to restructure their loan. Borrowers may be able to restructure their loan if:
- They aren’t able to refinance
- They are suffering long-term hardship like illness
- They are several months behind on their payments
In order to prove the above, a borrower will need to provide the following information:
- Recent federal and state tax returns
- Bank account statements
- Pay stubs
- Papers and other information regarding their loan
This information will help establish that the borrower has financial need and are unable to afford their current loan payments. If they qualify, you can begin working with them to negotiate new terms and payment plans that benefit both parties.