Loan Modification For Dummies

Loan Modification For Dummies

The crucial information you need to secure a reliable loan modification and save your home Behind on your mortgage payments? Worried about losing your home? Don’t panic. Loan Modification For Dummies gives you the reliable, authoritative, easy-to-understand guidance you need to apply for and secure a loan modification that lowers your monthly house payment and keeps you in your home. This practical, plain-English guide leads you step by step through the loan modification process, from contacting your lender to applying for a loan modification, evaluating the lender’s initial offer, and negotiating a modification that lowers your monthly payment while helping you catch up on any past-due amounts. You’ll learn how to communicate with your bank or loan servicer, recognize and avoid loan-modification scams, and find a knowledgeable loan modification specialist, if you choose not to do it yourself. Advice on determining whether you’re likely to qualify for your lender’s

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SBA Default: Deferment vs Modification

If business has been tough lately, (and let’s face it, if you were open in 2009, this applies to you) and you need some help, SBA lenders generally offer two varieties of help: deferments and modifications.

Deferment: A loan deferment is typically more short term in nature than a modification.  Generally lasting for up to 12 months, a deferment can be viewed as a short term “band-aid” that allows a borrower to abstain from making full contractual payments.  Some lenders will allow full payment deferment (i.e. $0 payment), an interest only deferment, or some other reduced amount.  After the deferment period expires, you will be expected to resume regular contractual payments. The deferment is a “first line of defense” when it comes to SBA Loan Workouts, so unless your lender thinks that your problems are long term in nature, that’s often the first form of relief you’ll be offerer.

Modification: If a deferment is a “band-aid”, then a modification can be considered to be “surgery”.  The goal of a modification is to permanently change your loan terms in order to permanently reduce your monthly payment.   There are a few basic elements of a loan that could possible be changed:

1) The Rate – While not impossible, a rate change is unlikely.  The main reason is that many SBA loans are sold to investors.  Since the investor agreed to buy the loan at a certain rate, an investor will rarely agree to a rate reduction.  Additionally, if a lender were to use risk-based pricing, lowering the rate on a defaulted loan would be out of the question.

2) The Term – Out of these 3, a lender is most likely to look at extending the term of your loan, thereby reducing the payment.  For example, if you have a 10 year loan, they might look at extending it to 15 or 20 years.

3) The Principal Balance -  Writing off principal is not an option if you want to keep your business open.  The SBA does have a settlement process, but in order to qualify, a business must cease operations and all business assets must be liquidated.

Sba Loan Modification ? What If You Are Current?

A woman I used to work with had a sign on her desk that read “If you think nobody cares about you, try missing a loan payment.” While meant to be humorous, that little anecdote says a lot about how lenders choose to service their loan portfolio. More and more, SBA borrowers are coming to us after their lender turned them down for a loan modification.

The reason for the denial? They haven’t missed a payment.

Let’s look at this from the lenders perspective:

If a borrower is current on their loan, then it must stand to reason that the borrower has the money to make their loan payment. If they have the money to make their payment, then they clearly don’t have the need for a loan modification or deferment.

In today’s weak economy, lenders are overwhelmed with loan modification and deferment requests. Due to so many applications flooding the banks, the only logical thing to do is to “take care of” the most urgent requests. In other words, banks are going to put their effort into saving businesses that are on the verge of collapse, with the first symptom of collapse being missed loan payments.

Unfortunately, the result of the thinking described above means that borrowers who are current on their loan, borrowers who have sacrificed by cutting costs, employees, and even their own salaries, are getting doors slammed in their face in favor of borrowers who simply give up and stop paying.

So what’s the solution? Short of actually skipping payments (which is some cases really is the only way to get the banks attention), the best way to demonstrate the need for a modification is through cash flow analysis. In a nutshell, your cash flows need to demonstrate that the business operations are not generating sufficient cash flow to service the debt based on the existing terms. Just because you are making payments does NOT always mean that the business is generating sufficient cash flow, and that point needs to be driven home to your banker. (Note: if you are not comfortable crunching your own cash flow numbers, this is something that Distressed Loan Advisors specializes in).