California rates third in the number of foreclosures in the United States; it follows closely behind Nevada and Florida. Many homeowners in California are underwater on their mortgage payments. The situation keeps getting worse as people are increasingly facing unemployment, unexpected medical bills, divorce, and other challenges. If you are struggling to pay your property loan, San Diego Bankruptcy Attorney can guide you on the bankruptcy and loan modification process.
Loan Modification to Extend the Term
It is common for people to experience a reversal of fortune, which might make it difficult to meet loan installments. A majority of people struggle in paying their mortgages and meeting other financial payments. If you are unable to pay your property loan, you have a few options to choose from. You could choose to refinance the loan, modify the loan, or file for bankruptcy. It is also possible to combine the three options to help you save your home or property from foreclosure. With the help of a competent attorney, you can be able to lower your property repayments, avoid default, and finally get out of your debts.
You should consider loan modification if a loan becomes impossible for you to repay. The lender could modify the terms of your loan by reducing the interest rate, extending the loan repayment period, or changing the loan type to make it easy to repay.
The Goal of Loan Modification
A loan modification aims to make it affordable for the borrower and to prevent the lender from losing money. A mortgage lender has the freedom to change any term of the loan to make it affordable to the borrower. Several ways of modifying a loan include:
- Changing the loan type from an adjustable-rate loan to a fixed-rate loan
- Amending the loan’s interest rate to a lower one
- Changing or extending the term of the loan. For instance, if a loan was payable in 30 years, the lender can make the loan payable in 40 years
- Lenders can defer some of the principal
- Lenders can forgive or exempt the borrower from paying some of the principal
- Lenders can add arrears to the back end of the loan
A loan modification is beneficial because it saves the borrower from having to deal with a foreclosure of the home. Foreclosure can be a costly process. Borrowers can be able to secure favorable loan modification terms by taking advantage of government programs. Some conventional lenders also have in place their loan modification programs.
Requesting for an Extension of Loan Term
You can request a loan modification from the lender at any time as long as you have suffered an income loss or any other relevant hardship. The modification will help you get a better loan deal, which will have a lower monthly installment. With better loan terms, you will be able to avoid foreclosure and remain in your home.
You will start receiving penalties and late notices from your lender immediately you start falling behind on your loan payments. You might receive a notice of default after you fall behind on payments for three to four months. Within forty days after receiving the notice of default, you are likely to receive a foreclosure notice. If you start receiving these notices, it might be the perfect time to get in touch with a bankruptcy attorney and request a loan modification. You do not have to wait until you fall behind on payments to request for a modification; you can request for modification even before you become delinquent on the payments.
In California, the majority of lenders have loss mitigation departments. These departments are responsible for handling large volumes of calls from people requesting modification of their mortgages. With so many people calling the loss mitigation departments, you are likely to get lost in the shuffles.
You can extend the loan term of your mortgage with less hassle by choosing to work through an experienced attorney. Instead of competing with a large number of homeowners in need of assistance, it is important to seek the assistance of an experienced and knowledgeable bankruptcy attorney. An attorney can easily get the loan modification that works best for you.
Difference between Refinancing and Extension of Loan Term
Loan refinancing entails replacing the new loan with an entirely new loan. The goal of loan refinancing is to reduce the applicable interest rate and to change other unfavorable terms of the loan. For instance, you can refinance your loan to change it from an unfavorable adjustable rate. You refinance your loan through a new lender or your current lender.
You cannot qualify for loan refinancing unless you are creditworthy. To qualify for loan refinancing, the value of your property should not have dropped to a certain point. You cannot refinance if you owe more than the value of your property.
Extending the term or duration of your loan through modification changes the terms of the existing loan. To qualify for loan term extension, you do not need to attain a certain level of creditworthiness, like in the case of refinancing. However, it should be evident that after extending the term of the loan, you have enough money to meet the new loan installments.
While modifying loan terms, lenders are usually more flexible and willing to give the borrower a favorable deal to make the loan payments affordable. However, it is important to note that loan term extension could have higher interest rates than a refinance.
Extending the Loan Term During Bankruptcy
It is not advisable to wait until you are on the verge of bankruptcy to seek a modification of your loan. However, if you have already filed for bankruptcy, not all is lost. Bankruptcy can help you take advantage of the automatic stay. After filing for bankruptcy, you can be free from foreclosures and other actions aimed at debt collection. You will have some breathing room, and you work on eliminating your debt through Chapter 7 or Chapter 13 bankruptcy.
When you file for bankruptcy, the bankruptcy court will be in control over almost all factors that touch on your finances. You will be able to go about your routine activities, like paying utility bills and buying groceries. However, extending the term of your loan through loan modification does not work the same way as a bankruptcy.
The action that the bankruptcy court will take to approve loan modification will depend on whether you have filed for bankruptcy through Chapter 7 or Chapter 13. While filing for bankruptcy under Chapter 7, the lender might request you to get a court approval as you apply for a loan modification. While filing for Chapter 13 bankruptcy, court approval is necessary regardless of whether you require an extension of the loan term or not. In either case, your bankruptcy attorney will have to file a motion with the court to obtain the court approval.
Loan Modification Under Chapter 13 Bankruptcy
If you decide to file for bankruptcy under Chapter 13, you have to propose a plan for your debt repayment. Usually, the borrower makes payments to a trustee, and the trustee distributes the money to the lenders who have filed valid claims. The debt repayment plan under chapter 13 bankruptcy has to include certain types of past-due debts, including alimony, child support, and past-due income taxes. The repayment plan could also include arrears owed to the mortgage company and other secured loans like car loans.
When you apply for an extension of the loan term, the rolling of mortgage arrears into modification is not automatic. For the removal of arrears, your attorney would have to file a motion and seek a modification of the repayment plan under chapter 13.
Steps for Extending the Loan Term
To get a property loan modification, a borrower has to work hand-in-hand with the lender by following certain steps:
Apply for Modification
-This is the first step while seeking an extension of the term of your loan. Before approving the modification, most lenders will request for a proof that you have the minimum income to pay the modified installments. Some lenders might also request a credit report. However, in most cases, a minimum credit score is not a requirement while applying for a loan modification. However, the credit report will help the lender know if you have existing debts from other lenders, which you have to service every month.
Making Trial Payments
–This is the second step after applying for a loan modification. At this step, you will have completed all the paperwork, and the lender will be confident that you will probably meet the new minimum requirements. The lender will allow you to make several trial payments under the new loan term. In most cases, lenders offer buyers a chance to make three trial payments.
– This is the last stage in the loan modification process. After you make the trial payments successfully, the lender will make the final decision to approve the loan term extension.
Qualifying for Loan Modification
Whether you qualify for a modification of your loan will depend on several factors, including whether the lender is a mortgage company, a bank, or other entities like Fannie Mac or Fannie Mae. Each lender has distinct criteria and requirements for qualification. However, you are likely to qualify for a modification of the term of your loan if:
- You cannot qualify for a refinancing of the mortgage loan
- You have encountered a change in your financial circumstances, and you are in danger of default or delinquency
- More than 31% of your monthly earnings go to meeting housing costs like property taxes, mortgage payment, homeowners association dues, and property taxes
- The value of your property has declined, and you owe the lender more money than the value of the property.
Modifying the Loan Term under Chapter 7 Bankruptcy
If you file for bankruptcy under Chapter 7, you will not have a mechanism to help save your house like in the case of Chapter 13 bankruptcy. However, even if you file for bankruptcy under Chapter7, you can work out with the lender. If the lender approves a modification of your loan term, the law does not prohibit you from modifying the loan. However, the modification will be entirely at the lender’s discretion. In most cases, the lender might want to wait until it is clear that your property trustee is not interested in selling the properties to pay the creditors.
When you file for bankruptcy under Chapter 7, the process will last for 4 to 6 months from the date of filing for bankruptcy to when you receive a discharge. During this process, your property will be in a bankruptcy estate. Even if you still have some control and access to the property, you will share the control with the bankruptcy trustee. The court appoints the bankruptcy trustee to oversee your property.
If your property is part of the bankruptcy estate, it’s not possible to encumber it, sell it, or take any other action like modifying the mortgage without first seeking approval from the court. The trustee has the discretion to determine if it is worth selling your property and distributing the proceeds to your creditors.
The court will be in control of your property; however, if the trustee decides that the property is not to liquidate the property, the court will no longer control it. The trustee can abandon your property by filing a notice with the court. Upon abandoning your property, the trustee releases the control of the property back to you. Once the property is under your control, you can easily seek loan modification from the lender.
The trustee can decide not to abandon your property and, instead, sell the property to pay off the creditor's debts. When filing for bankruptcy, you can exempt or protect some property from the control of the bankruptcy court. For instance, you can protect the equity of your property up to a particular value.
Applying for Modification of Loan Term
The trustee might take some considerable time before deciding whether to sell or abandon your property. Even as you wait for the trustee to decide, you can talk to your loan lender and request for modification of your loan term. In some instances, your bank could send a request to your bankruptcy attorney requesting you to apply for a modification. Sometimes, the lender may agree to modify your loan while the bankruptcy trustee has not yet abandoned the property. You can take action by filing a motion requesting approval of the modification by the court. You could also request the bankruptcy trustee to abandon the property to give the option of loan modification.
It is important to note that if the trustee decides to sell the property, there is no need for applying for the modification of the loan. Your lender may not be willing to discuss loan modification after you have filed for Chapter 7 bankruptcy. The lender may only be willing to discuss loan modification if he/she is sure that the trustee will abandon the property instead of selling it.
Modifying the Loan Term before Filing for Bankruptcy
While filing for Chapter 7 bankruptcy, many people are usually in a dilemma and often wonder whether to file for bankruptcy or first complete a loan modification. Most people wonder whether seeking a loan modification before filing for bankruptcy will affect their ability to file. It is important to understand several factors while completing a loan modification.
If you have already applied for a loan modification, it would be advisable to complete the property loan modification before you file for bankruptcy. If you file for bankruptcy before completing the modification process, the lender might require you to start the process. For instance, if you apply for bankruptcy during the trial payment period, the bankruptcy may interrupt the process.
The lender might require you to resubmit a loan modification application before considering you for a loan modification. Therefore, if you have been working for a long time to have your loan modified, filing for Chapter 7 bankruptcy may interrupt the process. You may not be able to complete the modification process as planned. When you apply for bankruptcy, you will get an automatic stay. With an automatic stay in place, the lender has to stop the negotiation process until he/she gets an authorization letter from your bankruptcy attorney.
After receiving authorization from your attorney, some lenders will need you to restart the application for a loan modification. However, some lenders will not need to restart the process and will continue to work with you after receiving authorization from your attorney.
If you have not initiated the loan modification process, you could decide to first file for Chapter 7 bankruptcy and then start the loan modification process. If you have initiated the bankruptcy, the lender will need your bankruptcy attorney to sign a letter to authorize them to contact you and discuss the loss mitigation options like a loan modification.
After the lender receives the authorization letter from your attorney and the completed application documents, the loan modification negotiations can begin. If the lender approves the modification during bankruptcy, the lender would require the court to approve the modification before finalizing it.
Find an Experienced San Diego Bankruptcy Attorney near Me
For many property owners, filing for bankruptcy is a challenging and stressful procedure because they risk losing their home. Seeking for a loan modification, including extending the loan term, can help you preserve your property. You need the guidance of a competent bankruptcy attorney. San Diego Bankruptcy Attorney offers reliable legal services and can guide you through the bankruptcy and loan modification process. Contact us at 619-488-6168 and speak to one of our attorneys.