Loan Modification is the restructuring of the existing payment terms of a loan, most commonly used to salvage a nonperforming mortgage loan.
Loan Modification may allow borrowers amidst financial hardship to stop foreclosure and keep their home.
Payment terms and payment variables such as the interest rate are adjusted in a way that lowers the monthly installments. Lowering the monthly mortgage payment via mortgage modification allows the homeowner to make home affordable and thus keep their home.
Who are Modifications For?
These agreements are used to help homeowners who are unable to pay their current monthly mortgage payments. Usually, these homeowners are already in default and often are in foreclosure or have already been through the foreclosure process but still live in the home.
Lenders typically only use this loss mitigation tool when dealing with a loan that has an outstanding balance larger than the current value of the home. If dealing with a mortgage that has a balance considerably less than the home value the property will be sold and the homeowners will be evicted. At best the homeowner may be offered financial aid as foreclosure relocation assistance. This type of program is commonly referred to as Cash for Keys.
How do Homeowners Apply for a Loan Modification?
If a homeowner wants to try to get a restructured mortgage they need to apply directly with the loan servicer or mortgage company. The best thing to do is call and get the exact instructions of how the lender prefers the homeowner to apply. Most likely this process will start by filling out an application and submitting a mortgage hardship letter. Next a monthly budget, income information, supporting income verification documents, a list of assets and liabilities, and other relevant info will be requested.
These days there is typically some sort of Government mortgage relief program available to homeowners and lenders. These programs have helped streamline the approval process, provided lender and homeowner incentives encouraging the approval and follow through of the loan modification, and has established general guidelines of how to modify the existing terms.
How Much Does the Loan Modification Save the Homeowner?
Nowadays most of these agreements result in a monthly mortgage payment that is approximately 31% of the homeowner's income. To get to this figure the interest rate may be dropped, the term of the loan may be increased, and in some cases, the principal amount owed is lowered. This would be the standard result for the Obama loan modification program which has restructured millions of home loans.