What is a Loan Modification?

A loan modification is an adjustment to the original terms agreed upon by the lender and the borrower, there are three areas that can be adjusted, they are: Interest rates, principal owed and length of the loan. The outstanding principal owed is the one area a lender is least likely to want to modify, but in some cases they must negotiate this area with the borrower to make a modification work.

Reason 1 – The Homeowner Can’t Make The Payments

The most common reason a lender will consider modifying a mortgage is because the homeowner can no longer make their payments. There are a variety of reasons for this, the homeowner lost their job, a divorce, adjustable mortgages, the homeowner took out a equity line of credit which they can’t repay, illness, these are some of the common ones.

In these cases the lender, once the homeowner proves their situation is in bad shape, will consider a loan modification. It costs the lender a lot of money to foreclose on a property, so keeping the homeowner in the house is more cost effective in many cases. Since each situation is different you cannot pin down one type of modification, if the homeowner just needs time to catch up, then deferring payments for a period of time and attaching them to the back end of the loan could be the right modification for that person. Someone else may need a reduction in interest rates or even forgiveness of some of their principal owed, it goes on a case by case basis.

Reason 2 – The Lender Doesn’t Have The Proper Paperwork

During the recent housing mortgage debacle you see lenders offering homeowners incentives to remortgage their home at more favorable terms for basically no reason. If we go back several years and discover these loans being sold, resold, repackaged and so on, you can see how the paperwork can get lost, this prompts the lender to make these offers in exchange for new contracts.

In these cases a loan modification is done, but for very different reasons, the homeowner actually benefits from this type of modification.

One final note – You now see lenders offering cash incentives to homeowners that cannot make their payments, these cash incentives are so they will leave the property in good shape and within a certain time frame. I guess you can consider this a buyout loan modification.

So, as you can see loan modifications take place for a variety of reasons and there are many combination’s a lender can use to help out the homeowner, it just depends on the willingness of the lender and the borrower to come to an agreement. Since these can be highly emotional times, hiring a loan modification professional might not be a bad idea in these situations.