What is a Loan Modification?

Published by Thomas Herold in Banking, Real Estate

'Loan Modification' is explained in detail and with examples in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A loan modification proves to be a set of changes on the original terms and conditions of a mortgage loan agreement. These must be agreed to by both the borrower and the lender. The housing crisis of 2007 caused many American homeowners to be on the verge of foreclosure. The numbers of imminent and in process foreclosures increased dramatically.

Loan modifications were amended to be a means for home owners to stay out of foreclosure and keep their houses. The process is not simple or quick, and it can be time consuming. Consumers also have to watch out for scams that prey on the vulnerable owners of homes.

Before the financial crisis erupted, a loan modification turned out to be a means for borrowers to ask for better interest rates on their mortgages without having to undergo an entire refinancing ordeal. Every mortgage company did not offer them. The ones that featured these would provide them for a cost to borrowers on the condition that their mortgage had not been resold to another firm. Now they are far more commonplace since lenders needed unorthodox solutions to help homeowners who were struggling to keep up with their payments and avoid foreclosure.

For the process of a loan modification to begin, the borrower must first request such a change to the loan terms. These changes once only affected the interest rate and made them lower. The more recent packages offered since the Great Recession are even able to change adjustable rate mortgages into standard fixed rate types. It is possible that a lender could suggest such a change to its borrowers as a possibility. Usually the borrowers initiate the process by determining they can not keep up with their loan payments and asking for help and a modification.

The next step is for the lender to consider the borrower’s request. They are not required to agree to these petitions. A great number of lenders have very strict guidelines on which borrowers they will approve for modifications and which they will not. This is the case even when the homeowner has foreclosure looming. It is partly because such modification programs were not created to save home owners from rising adjustable interest rates or payments they could not handle. They were made to create a cheaper way of refinancing down to better interest rates. Each lender makes its own rules for which modifications they will accept and which they will reject.

Finally the lender will decide whether to approve or reject the modification request. They will then notify the borrower in writing. Many borrowers are rejected because they have been late with their mortgage payments frequently or too recently. Other lenders might not be in possession of the original loan any more. Whatever the reason is, the lender will state this in the letter.

If the request for modification gains approval, the request goes through to the department that handles loan servicing. There the loan will be modified to the new terms and conditions. Usually this will only reduce the interest rate and not change the loan’s amortization. It may require several payment periods before these changes take effect. This is why borrowers should always keep making the payments in the amount and time for which they are scheduled.

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The term 'Loan Modification' is included in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.