Loan Modification Agreement

Scholasticus K Jan 27, 2019
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There are several cases where the loan installments and rate of interest seem very exorbitant. The loan modification agreement is used to modify the terms and conditions of the loans that seem exorbitant.
The terms and conditions of a loan specify the rate of interest, the amount to be paid for every installment, time period of the loan, and the number of installments that are to be paid in the repayment process. A modification is used by people when they find the terms and conditions to be exorbitant, or are not able to pay off the installments on time.

The Concept

The term loan modification, basically implies the change in the terms and conditions of the loans. In the process of lending, the lender drafts some crucial documents that are often referred to as the agreements. They usually contain the details of the given elements, that play a very important role in the process:
  • Rate of interest
  • Amount of one installment
  • Time period of the loan
  • Collateral, in case if the loan is secured
  • Nature of the loan
At times the borrower finds himself in a situation, that is totally unanticipated, where he is unable to make timely installments. The late installments affect both the lender and borrower, as the lender tends to lose a considerable amount of money and the credit rating and credit score of the borrower tends to go down with every late payment of installment.
This is where the borrower and lender reach on a mutually accepted set of terms and conditions, where the rate of interest and installments are changed.

Process

There are several agencies, lawyers, solicitors, and attorneys who provide this service. An agreement to modify the loan can also be drafted and negotiated, between the lender and borrower without any outside help.
The loan modification agreement procedure can be initiated by any person, lender or borrower. In most of the cases the lender sets up a series of terms and conditions that the borrower has to fulfill in order to qualify.
Another very important factor that is considered in the process, is the debt ratio. The debt ratio is basically the amount of income that you tend to spend on your basic house hold necessities or rather housing expenditures. In comparison to the total income, this expenditure should be ideally between 30 to 50%.
Most of the lenders prescribe upper and lower limits of the debt ratio, depending upon size and specs of the loan. The gross costs of one installment should not exceed the upper limit of the prescribed debt ratio.
It basically means that if your monthly household income exceeds the amount of installment, then you will need a modification. Another way to calculate the debt ratio is to divide the total monthly installments with your inward cash flow. This ratio can also be used to compare your income and household expenditure, to determine if you qualify or not.
The next important step, is framing the document. The terms have to be written down clearly and without any distortions. It would be best if you have an attorney in order to frame the document for you. You can also consult a sample to get the specs and elements right. Here's what you can include.
  • Current and previous rates of interest
  • Current and previous installment details
  • Date on which installment has to be paid
  • You will also need to sign the document along with the lender
  • In many cases the signatures of witnesses are also required
The document has to be drafted as carefully as possible. A mortgage loan modification, debt settlement and debt negotiation and foreclosures, are some other cases where the lender and borrower, sign a modification agreement.