What is a Loan Modification?
The changing of an existing loan's terms is known as a loan modification. For example, reducing the interest rate, extending the repayment period, changing the type of loan, or any combination will lower interest rates.
Changes of this kind are usually made because the borrower cannot pay back the original loan. A settlement company or an attorney is usually necessary to negotiate a successful loan modification. There are some borrowers eligible for government loan modification assistance.
How Loan Modification Works
Modifications of secured loans like mortgages are more common than modifications of unsecured loans.
- When a borrower in financial difficulty can't repay the loan in its original form, they are granted a loan modification.
- Many successful applicants receive legal or professional assistance.
- Some consumers have access to government programs that assist mortgage holders.
Lenders may agree to loan modifications during a settlement procedure or in the case of a potential foreclosure. In such cases, the lender has concluded that a loan modification will be less costly for the business than foreclosure or charge-off.
Forbearance agreements are not the same as loan modification agreements. The borrower with a temporary financial problem can receive short-term relief with a forbearance agreement. With a loan modification agreement, the borrower receives long-term relief.
It is possible to modify a loan by reducing the interest rate, extending the repayment term, or changing the type of loan.
Various professional sources offer assistance in negotiating loan modifications, including:
- Companies that settle with creditors are for-profit entities that assist borrowers in reducing or eliminating debt.
- Foreclosure lawyers specialize in negotiating on behalf of owners of mortgages in default and at risk of foreclosure.
Some lenders may be eligible for government assistance.
Government Programs
The most common type of modification is the mortgage loan modification since large amounts of money are at stake. As a result of the housing foreclosure crisis between 2007 and 2010, the government implemented several loan modification programs for borrowers.
Several of these programs have expired, but government-sponsored loan modification assistance is still available to some borrowers. Some of these include:
- Fannie Mae, the government-sponsored mortgage company, has a Flex Modification program.
- Mortgages insured by the Federal Housing Authority may be eligible for a modification through the agency's FHA-HAMP program.
- Military veterans can get mortgage delinquency counseling through the U.S. Dept. of Veterans Affairs.
Some traditional lenders have loan modification programs.
Applying for a Mortgage Loan Modification
It is necessary to provide the borrower's financial information, the mortgage information, and the specifics of the hardship situation when submitting a mortgage loan modification application.
The requirements and qualifications will vary from program to program. Collateral values are typically determined by the amount the borrower owes, the property being used as collateral, and the specific characteristics of the collateral.
If a borrower is approved, a new loan modification offer will be made along with the approval.