Mortgage Loan Modifications Explained

Mortgage Loan Modifications Explained

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A loan modification will change your mortgage terms, making the loan more affordable.

A loan modification may be the best option for eligible borrowers if they are struggling to make the monthly payments on their mortgage or those who fall behind and face foreclosure.

If this describes your borrower’s current situation, we’ve put together this list of things you should know about mortgage loan modifications.

What’s a mortgage loan modification?

Don’t confuse a mortgage loan modification with a mortgage refinance. While refinancing involves replacing your existing mortgage with a new loan, a mortgage loan modification will simply change the terms associated with your current mortgage.

How do mortgage loan modifications work?

A loan modification may entail extending the term length of the mortgage, obtaining a lower interest rate, or changing loan types. For example, a modification may include switching from a loan with an adjustable-rate to one with a fixed rate.

Though the modification terms are ultimately in the hands of the mortgage lender, the typical outcome for the borrower is a lower monthly payment. Because foreclosure can be costly, lenders may prefer to work on a loan modification to avoid the hassle.

How does a borrower qualify for a mortgage loan modification?

Ultimately, it is up to the lender what they may require to grant a loan modification. A lender may not want to grant every borrower who struggles to make their monthly mortgage payment a loan modification.

Most lenders will consider the homeowner on the verge of default if they are not yet behind on their payments but are facing some unexpected life change. This life change may include loss of income, a spouse’s death, or an inability to repay the loan based on its original terms due to an illness or a disability.

Most lenders will offer a loan modification program to their customers. In some cases, loan modifications may be temporary, and, in other cases, they may be permanent.

What is the process for obtaining a loan modification?

The borrower should contact the lender immediately and inquire about the available options if they are struggling to make the loan payments. A borrow that procrastinates on contacting the lender will only worsen the problem.

The application process for a loan modification will vary among lenders. Some lenders will require the borrower to submit a letter that explains why the borrower is seeking a modification, and others will require specific proof of hardship.

Some important information on loan modifications.

A loan modification can negatively impact a person’s credit score. However, the lender should be sure to explain to a borrower that a dip in their credit score is not nearly as damaging as a foreclosure would be.

If the borrower receives a temporary loan modification, they will eventually be required to return to the original loan terms and repay any deferred amount. In the case of a permanent modification, a lender may require an entire year, or even two years, of on-time loan payments before the borrower can qualify for a new mortgage.

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