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How to Qualify For a Mortgage Modification?

Mortgage modification is a process that involves modifying a loan due to the borrower’s long-term inability to pay back the loan amount. Typically, loan modifications mean reduction in interest rate, reduction in monthly payment, reduction in principal, reduction in late fees, or extension of the loan term. A lender is usually open to modifying a mortgage if the cost of doing so is lesser than cost of default. When applying for a mortgage modification, the borrower can be – current, late, in foreclosure, in default, or in bankruptcy.

If you are unable to repay your home equity loan, bad credit mortgage, or any other type of loan in Toronto; mortgage modification can be an effective solution for your problem. In order to be eligible for a mortgage modification (in bad credit mortgages, home equity loans, or any other loan) in Toronto, you need to show a proof of your inability to pay back the loan and complete the trial period to prove that you can easily pay the new monthly installment. You also need to provide all the needed documentation to your lender for evaluation. The required documents will likely include the proof of your income, financial statement, bank statement, most recent tax-returns, and a convincing hardship letter.

Qualifying For A Mortgage Modification

To get an approval for your mortgage modification application, you need to meet the following requirements:

Financial Hardship – The first step to qualifying for a mortgage modification is to write a hardship letter to the lender to explain your financial condition. Acceptable reasons for not being able to repay the loan amount would be loss of job, illness, disability, or death of spouse/child. If you are unable to pay your loan installments because you’ve racked-up a lot of debt & purchased a new car, you are likely to be denied the modification in your loan. These were your poor decisions & the lender won’t help you deal with their consequences.

Unable To Refinance The Mortgage – Refinancing into a lower interest-rate or better loan term is probably the first thing a borrower thinks of, when not being able to make the loan payments. However, not everyone is able to refinance their mortgage and hence turns to the option of loan modification. If you can’t refinance or think that your mortgage already has attractive terms and you just need temporary “breathing room” so you could get through your financial hardship, you can qualify for a “mortgage modification”.

Debt-to-Income (DTI) Ratio – In a mortgage/loan modification process, Debt-to-Income ratio is perhaps one of the most critical qualifying factors. Understanding the concept of DTI ratio & how it applies in your case can actually increase the chances of your approval for loan modification. When your lender analyzes your mortgage for modification, they consider the Debt-to-Income ratio to decide whether to approve your mortgage modification application or deny it. This ratio is also important due to the fact that it is used by the lender to determine your new monthly loan installment. Although lenders in Toronto have different requirements in relation to DTI ratios for mortgage modification, typically they accept a DTI ratio in the 36% to 45% range.