Loan Modification: How to Get a Mortgage Loan Modification

What is Loan Modification?

Mortgage loan modification is the renewal of a mortgage at different terms than what the lender (e.g. bank) and borrower (you) agreed to in the original mortgage contract. Basically any loan can be modified if the lender and borrower are in agreement with the new terms. Loan modification has become very popular recently as homeowners struggle to keep up with their monthly mortgage payments and lenders strain to collect all of their due incoming payments.

How Loan Modification Works

The way a mortgage normally works is that the borrower (homeowner) makes payments -- including interest -- until the mortgage is paid in full (or paid off). Typically, until the mortgage is fully paid off, the lender legally holds a lien on the property so that if the borrower sells the property before the mortgage is paid off, the unpaid balance of the home loan must be paid directly to the lender to release this lien. Any change to the terms of the mortgage is considered a modification, but "loan modification" mostly refers to a change in terms based upon either the inability of the borrower to keep up with monthly payments as they're stated in the mortgage contract.

Different Types of Loan Modification

Mortgages can be modified in different ways to help the borrower and make it easier for him or her to make monthly payments on time. Here are some of the things that a loan modification can change:

• Lowering the interest rate
• Changing from an adjustable rate to fixed rate mortgage
• Improving an adjustable rate by changing the way it's computed (lower cost)
• Reducing the loan's principal (total amount due)
• Reducing late fees and other fees or penalties
• Making the term or life of the mortgage longer so that monthly payments are lower
• Fixing the borrower's monthly payment to a certain amount based on income

How to Get a Loan Modification

A homeowner can apply for a loan modification whether he/she is making current monthly payments, is falling behind on payments, has defaulted on the home loan, or is even in foreclosure or bankruptcy. Each case will mean that the terms will be different as far as how the loan can be modified, and will vary by lender.

Mortgage lenders have the motivation to make bank loan modifications and help the borrower because the lender will usually profit more from a loan that is eventually paid in full than a loan that forecloses and forces the property to be sold for less than it's worth. The lender can make a modification at its own discretion if it considers this the best course of action.

The government can create a mortgage loan modification program in which it's voluntary for lenders to participate, but at the same time make incentives for the lender to participate. A mandatory mortgage modification program requires the lender to make loan modifications according to each borrower's situation and loan payment history, as well as details on the property itself.

If you are falling behind on mortgage payments, take advantage of this opportunity and check to see if you are eligible for a loan modification. It can offer peace of mind as you are less stressed and better able to make payments, and can even prevent foreclosure and other problems. Good luck!

reference: wikipedia.org