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Loan modification agreement is the legal document that codifies your loan modification, making it legally binding. It covers every facet of the newly modified loan, including the money you still owe, new payment terms and payment deadlines. By signing it, you and the lender promise to follow it's terms and signify that you understand that you will face penalties if you don't. Once the loan modification agreement is signed, your loan modification kicks in and you can begin making payments under the new terms.
Understanding Loan Modification
In order to understand what a loan modification agreement covers, you must first understand what loan modification entails. Loan modification alters the terms of your mortgage loan in order to make your monthly payments more affordable. It does not decrease how much you owe on your mortgage - it merely redistributes it over a longer period of time. Mortgage lenders offer this option if you have trouble making payments and face the danger of defaulting on your mortgage loan. This is something that lenders will want to avoid. If you default, they have to recover the money you would otherwise pay back by foreclosing on your home and selling it. In the current housing market, it is unlikely that they will be able recover all of their losses.
By offering you loan modification, the mortgage lender hopes that you will be able to repay what you owe. If you still have trouble making payments after the loan has been modified, chances are pretty good that the lender will cut it's losses and foreclose on your home without giving you another chance.
What Loan Modification Agreement Includes
Loan modification agreements can vary quite a bit depending on the lender, and they are often customized depending on the particulars of the borrower's situation. However, there are several things that all loan modification agreements include in one form or another. They are the following:
- Current outstanding loan amount - how much you still owe the lender at the time the loan modification takes effect. As noted before, you will have to repay all of it by the end of the repayment.
- New interest rate - the interest rate that you get as part of the loan modification. Usually, the lenders will lower the interest rate, though this isn't always guaranteed. The agreement also indicates whether the interest is fixed or variable. If the interest rate is fixed, this number indicates your interest rate for the duration of the loan repayment period. If the interest rate is variable, the number indicates the starting interest rate. It will be adjusted according to market conditions after a certain period of time. The loan agreement should specify how long that period lasts.
- New principle - the principle is your monthly payment minus interest. Unlike interest rates, this number will always remain constant.
- Maturity date - this indicates the date when the loan repayment period ends and the entire outstanding loan amount must be repaid.
Covenants - this covers all of the obligations between the lender and the borrower. It the part of the document that states that you agree to repay the loan under the terms specified above or face penalties from the lender. It also specifies what those penalties and what conditions are necessary to trigger those penalties. This is also the part that ensures that lender doesn't change the terms of the contract on a whim.
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