The Truth behind Loan Modifications

(Originally published as an article within ECCU’s former e-publication, Ministry Banking Today.)

With all the talk about loan modifications, it’s hard to ignore this hyped-up option when money gets tight for your ministry. But do you understand what they really are—and what it takes for a lender to even consider doing one?

First, let’s look at the most common misconceptions about loan modifications:

Myth #1: “If things get really bad, at least we have the option of a loan modification.” The truth is, when things are “really bad” it may be too late for a loan modification. The easiest and most effective modifications are minor tweaks—like adjusting your payment plan to help your ministry get caught up on a couple months of past due payments—rather than major overhauls. The earlier you to talk to your lender, the better your chances for a successful loan modification.

Myth #2: “Our lender won’t even talk to us until we miss a couple of payments.” This is, quite simply, a bad plan. Missing a few payments, either intentionally or unintentionally, is breaking your commitment to repay the loan as you’ve agreed to. Do everything in your power not to miss a payment, including talking to your lender at the first signs of financial distress.

With these clarifications in mind, what are some practical things you should consider before talking to your lender about modifying your ministry’s loan?

Don’t expect your lender to automatically assume responsibility to help fix the problem. This may seem obvious, but it is tempting to jump on the blame-shifting bandwagon and look for an easy way out. Remember that you signed a loan agreement, and your ministry is responsible for making payments according to its terms. This mindset will go a long way in a conversation with your lender.

Ask your ministry team: Are we willing and able? A lender’s inclination to consider a loan modification depends on your ability and willingness to do your part. You may be willing to make payments but just don’t have the ability if giving is down. You may be able to make payments, but are not willing to use ministry funds to pay the mortgage. Before approaching your lender for a modification, make sure you are both willing and able to work toward a successful plan.

Do the heavy lifting first. Before asking your lender for a reprieve, take a close look at your operations budget. How you manage your money is the first thing your lender will look at when considering a loan modification. Have you done everything you can to make cutbacks? Do you have a plan? Your lender will appreciate a conversation that goes something like this: “Attendance is up and giving is down. Here are the changes we’ve already implemented, and here’s what we intend to do going forward. And here is what might help us stay true to our modified mortgage payment, so that six months from now we should be able to return to our original payment plan.”

Be prepared to share financial information such as your business plan and budget. Your lender will evaluate these documents to: Determine the legitimacy of your need, consult about your situation, and find the best solution. Also, keep in mind that certain factors affect the pace and outcome of loan modification discussions. One is the quality and amount of financial information you are prepared to share. Another is the degree to which you’ve been proactive in communicating with your lender.

Above all, react quickly to early warning signs. Ministries that end up in foreclosure are the ones that continually miss their payments and don’t communicate with their lender. Again, talk with your lender at the first signs of trouble, and be sure to keep your congregation informed about the financial state of your ministry.

Are you more interested in refinancing than a loan modification? Check out the article Refinancing: What’s it going to take?

 

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