What is the loan modification?
Loan modification is a modification made to the terms of an existing loan by a lender. It could be an interest rate reduction, an extension of the repayment term, a different type of loan, or any combination of the three.
Such changes are usually made because the borrower is unable to repay the original loan. Most successful loan modification processes are negotiated with the help of a lawyer or settlement company. Some borrowers are eligible for government assistance for loan modification.
How the loan modification works
While a loan modification can be made for any type of loan, it is more common with secured loans such as mortgages.
Key points to remember
- A loan modification is usually granted to a borrower in financial crisis who cannot repay the loan according to its original terms.
- Successful applicants are usually represented by a lawyer or other professional advisor.
- Some consumers have access to government programs that help mortgage holders.
A lender can agree to a loan modification during a settlement process or in the event of a potential foreclosure. In such situations, the lender concluded that a loan modification would be less costly to the business than a foreclosure or debt write-off.
A loan modification agreement is not the same as a forbearance agreement. A abstention agreement provides short term relief for a borrower with a temporary financial problem. A loan modification agreement is a long term solution.
A loan modification can involve a reduced interest rate, a longer repayment period, a different type of loan, or any combination of these.
There are two sources of professional assistance in negotiating a loan modification:
- Settlement companies are for-profit entities that work on behalf of borrowers to reduce or alleviate debt by settling with their creditors.
- Mortgage modification attorneys specialize in negotiating for homeowners in default and threatened with foreclosure.
Federal government assistance is also available for some borrowers.
Mortgage loan modifications are the most common type due to the large sums involved. During the foreclosure crisis that took place between 2007 and 2010, several government loan modification programs were put in place to borrowers.
Some of these programs have expired, but government sponsored loan modification assistance is still available to some borrowers. These include:
- Fannie Mae, the government sponsored mortgage company, has a program called Flex Modification.
- Mortgages insured by the Federal Housing Authority can be changed through the agency’s FHA-HAMP program.
- Military veterans can obtain mortgage delinquency advice through the US Department of Veterans Affairs.
Some traditional lenders have their own loan modification programs.
Mortgage loan modification request
A mortgage loan modification application will require the details of the borrower’s financial information, mortgage information, and predicament details.
Each program will have its own qualifications and requirements. These are usually based on the amount the borrower owes, the property used as collateral, and the specific characteristics of the secured property.
If a borrower is approved, the approval will include an offer with new loan modification terms.