Mortgage Modification

AAA

DEFINITION of 'Mortgage Modification'

A permanent change in a homeowner’s home loan terms that makes the monthly loan payments affordable. The goal of mortgage modification is to prevent foreclosure. Mortgage modification can benefit homeowners by preventing them from losing their home and can benefit lenders by avoiding  the costly foreclosure process.

INVESTOPEDIA EXPLAINS 'Mortgage Modification'

To apply for a mortgage modification, a homeowner must complete an application package documenting income, assets, expenses and financial hardship.

The biggest mortgage modification program in the United States is the Home Affordable Refinance Program, created in 2009 by the federal government in response to the nation's housing crisis. This program helps homeowners who are struggling to pay their Freddie Mac or Fannie Mae-backed mortgage apply for mortgage modification with their loan servicer. These are borrowers who cannot do a traditional refinance to improve their loan terms because their home value has declined below the mortgage balance.

A similar program called the Home Affordable Modification Program helps borrowers with Federal Housing Administration-backed mortgages. Borrowers can also apply for a mortgage modification outside these federal programs. A nonprofit housing counselor can help with the process.

While a mortgage modification generally means less income for the bank because of a reduction in the mortgage’s principal amount, interest rate or both, this loss may be less than what the bank would experience by foreclosing on the borrower and reselling the property. Mortgage modification can turn a less-than-ideal situation into a win-win.

Still, foreclosure was much more common than mortgage modification during the housing crisis because banks claimed they lacked the resources to handle the large number of modification requests. This meant many homeowners who probably would have qualified for mortgage modification were not able to get into a modification program and, instead, lost their homes to foreclosure. 

RELATED TERMS
  1. No-Appraisal Mortgage

    A type of home loan used for refinancing for which the lender ...
  2. Private Mortgage Insurance - PMI

    A policy provided by private mortgage insurers to protect lenders ...
  3. Total Annual Loan Cost (TALC)

    The projected total cost that a reverse mortgage holder should ...
  4. Forbearance

    A temporary postponement of mortgage payments.
  5. USDA Non-Streamlined Refinancing

    A mortgage-refinancing option offered by the United States Department ...
  6. No-Appraisal Refinancing

    A type of mortgage for which the lender does not require an independent, ...
RELATED FAQS
  1. What is the difference between "closed end credit" and a "line of credit?"

    Depending on the need, an individual or business may take out a form of credit that is either open- or closed-ended. While ... Read Full Answer >>
  2. In what instances does a business use closed end credit?

    The most common types of closed-end credit used by both businesses and individuals are mortgages and auto loans. Businesses ... Read Full Answer >>
  3. What are the long-term effects of delinquent accounts?

    Delinquency occurs when borrowers fail to make payments on their loans. All loan borrowers should do their best to avoid ... Read Full Answer >>
  4. How was the American Dream impacted by the housing market collapse in 2008?

    The American Dream was seriously damaged by the housing market collapse in 2008. In many ways, the American Dream is a self-fulfilling ... Read Full Answer >>
  5. How much risk is associated with subprime mortgages?

    A large amount of risk is associated with subprime mortgages. Since the mortgages are specifically for people who do not ... Read Full Answer >>
  6. What are the financial consequences of filing for bankruptcy?

    The financial consequences of filing for bankruptcy are substantial and can be long-lasting. They include impacts on your ... Read Full Answer >>
Related Articles
  1. Insurance

    Why You Don’t Need Mortgage Protection Life Insurance

    Mortgage protection life insurance sounds great in concept - a guarantee that your mortgage will be paid off if you die unexpectedly. But take a hard look at what you get before choosing it.
  2. Home & Auto

    How To Get Rid Of Private Mortgage Insurance

    Private mortgage insurance benefits the lender (the sole beneficiary of PMI), but it can add a sizable chunk to your monthly house payment.
  3. Personal Finance

    6 Critical Moves That Will Save You Time and Money Before Hunting for a Mortgage

    There are many important aspects to consider and research before the process of selecting a home even begins.
  4. Credit & Loans

    Mortgage Amortization Strategies

    Should you get a 30-year mortgage? A 15-year one? Ways to decide which mortgage is the best fit.
  5. Home & Auto

    Homeowners Still Not Getting Money From $25-Billion Mortgage Settlement

    Was the recent mortgage settlement really worth it for homeowners, or are they still getting the short end of the stick?
  6. Home & Auto

    Benefits Of Paying Off Your Mortgage

    Paying off your mortgage in a reasonable amount of time can result in financial security and freedom.
  7. Home & Auto

    Advantages And Disadvantages Of Using A Mortgage Broker

    Mortgage brokers may be able to find you the loan of your dreams, but you should consider the potential downsides before hiring one.
  8. Home & Auto

    Why People Are Having Difficulty Making Mortgage Payments

    Many Americans are having a tough time paying their mortgages. Here are some reasons why some homeowners fared better than others during the housing crisis.
  9. Entrepreneurship

    5 Steps To Qualify For A Mortgage If You're Self-Employed

    Qualifying for a mortgage is a little more complicated for borrowers who are self-employed.
  10. Home & Auto

    The Benefits Of Mortgage Repayment

    Buying a home may be the biggest debt you'll ever incur. Learn why you should retire it sooner, rather than later.

You May Also Like

Hot Definitions
  1. Radner Equilibrium

    A theory suggesting that if economic decision makers have unlimited computational capacity for choice among strategies, then ...
  2. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  3. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  4. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  5. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  6. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!