What is a Mortgage Loan Modification and How can it work for Me?

Mortgage loan modification is something that has been talked about a lot over the past year as financial hardships have made it difficult for some to manage their monthly payments. Loan Modification is when your lender agrees to make a permanent change to the original terms of your mortgage loan. This could be in the form of an interest rate reduction, fixing the rate on an ARM loan, extending the amortization (i.e., making the loan a 40 year term to reduce the payment), changing the loan terms to require an interest only payment or even a principal reduction (reducing the amount owed). The purpose of the modification is to make it feasible for the borrower to make the monthly payments on the house.

Why would a lender agree to this and under what circumstances will they do it? Well, the lenders’ goal is to have loans it makes perform and, contrary to popular belief, they do not want to foreclose on anyone as owning homes is not the lenders business. So, if the borrowers’ personal circumstances indicate that a specific change in the terms of the loan will make it possible for them to make on-time payments on the debt then the lender will seriously consider making those changes.

Your specific circumstances are going to be the driving factor in whether or not a loan modification is possible. The lender is going to ask you to document your income so they can determine whether you are capable of making the existing loan payments and, if not, whether a modification of the terms will make it possible for you to make the payments. If you make $10,000 per month and your loan payment is $2,000 it’s not likely that your lender is going to modify the loan because it appears that you should be capable of making the payments. If you and your spouse were both working at the time you took the loan out and one of you has lost your job then a loan modification may be feasible as long as the lender believes making the change to the loan will enable you to make timely payments. If you are unemployed then a modification is not likely as the lender will want to know you have a stable income stream to make the new payments. Each case is different and they are going to be looked at individually.

There are a lot of companies that have popped up over the past year that offer to work as a facilitator to work between you and your lender. Generally, they charge an upfront fee (usually several hundred dollars) and give you no guarantee as to the outcome. Some of these companies are reputable but many are not so be careful. You really don’t need a modification company at all as you can work directly with your lender. However, some folks have reported excellent results working with a mod company. I have referred some of my clients to one which purports to have a 90% success rate. What they do is to review your financial data in advance of charging you a fee and then if they feel that your modification has a good chance of success they move forward. If it does not look like the lender will consider the modification they charge you nothing. This seems to be the best approach in my opinion.

So, a loan modification is one way for people who are experiencing a financial hardship to work with their lender and keep their home and their credit standing. It is a viable option and should not be ignored. If you think that you may be qualified for a loan modification give your lender a call and you may be surprised by the result. Good Luck!

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