A loan modification from your mortgage lender can provide much-needed financial relief if you are struggling to pay your home loan bill each month. With the right modification, your monthly payments will fall far enough so you'll be able to make your payments, even if you are going through a financial hardship. But if the loan modification offer from your lender isn't a strong one — if it doesn't lower your payment by as much as you think it should, for instance — you can reject the offer. The challenge lies in dealing with what happens next.
Make the Right Decision
When your mortgage lender offers you a modification proposal, think it over carefully before deciding whether to reject or accept it. You might consider rejecting the offer if it won't result in a new payment that you think you can comfortably afford. You might also reject the offer if you were requesting that your lender forgive a portion of your principal balance and instead it is only offering to reduce your interest rate for six months. You'll have to weigh the consequences of rejecting a modification offer, though. In a worst-case scenario, rejecting an offer can lead to a foreclosure.
If you reject your lender's modification offer, the odds are good that you'll be stuck with your current mortgage payment. If you are struggling to afford these payments, you will be putting yourself at risk of falling behind on them. This can lead to your defaulting on your mortgage. If you stop making your payments, your lender will eventually initiate foreclosure proceedings. You will also severely damage your credit score if you stop making payments. This is serious, because lenders rely heavily on these scores when determining who gets money and at what interest rates. You might find it difficult to borrow money or qualify for credit cards if you default on your mortgage.
A Short Sale
A short sale is one option if you reject your lender's loan modification offer. If you can't afford to make your mortgage payments, a short sale lets you sell your home quickly — with luck, quickly enough so you don't start missing monthly mortgage payments. With a short sale, your lender allows you to sell your home for less than what you owe on your mortgage. This allows you to sell your home for a lower price, which could speed up a sale. You will have to sell the home at a price your lender agrees to. If an offer is too low, your lender can reject it.
Deed in Lieu of Foreclosure
A deed in lieu of foreclosure is another tool you can turn to after rejecting your lender's offer to modify your mortgage loan. Under this arrangement, your lender agrees to take over ownership of your home without first evicting you through the foreclosure process. The lender will forgive all or part of your home loan. Remember, though, that neither a deed in lieu of foreclosure nor a short sale is a cost-free solution. Both will damage your credit score. But both will allow you to get out from a mortgage that you can no longer afford without having to suffer through a foreclosure.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.