What is 'Loan Modification'

Loan modification is a change made to the terms of an existing loan by a lender as a result of a borrower's long-term inability to repay the loan.

BREAKING DOWN 'Loan Modification'

Loan modifications may occur with all types of loans however they are most common in secured loans. Lenders may agree to a loan modification through a settlement procedure or in the case of a potential foreclosure. In these situations a lender typically believes that the loan modification will provide substantial savings in comparison to a charge off alternative.

A loan modification agreement is different from a forbearance agreement. A forbearance agreement provides short-term relief for borrowers who have temporary financial problems, while a loan modification agreement is a long-term solution for borrowers that adjusts the terms of a loan from its original obligations.

Loan Modification Procedures

Loan modification procedures typically include the support of legal counsel or a settlement company. Loan modifications will usually involve a reduction in the interest rate on a loan, an extension of the length of the maturity of the loan, a different type of loan or any combination of the three.

Settlement companies are for-profit entities that work on behalf of a borrower to help reduce or alleviate debt by settling with creditors. Borrowers also commonly work with mortgage modification lawyers who can help them to negotiate a loan modification for a mortgage that is threatened with foreclosure.

Mortgage loan modifications are common in the credit market since larger sums of money are at stake. In the mortgage market several government loan modification programs are available for borrowers. The Home Affordable Modification Plan (HAMP) is one leading program introduced through the Making Home Affordable legislation. Other programs can include the Home Affordable Foreclosure Alternatives Program and modification programs from the Veterans Administration and the Federal Housing Administration. Traditional lenders may also have their own loan modification programs. All of these programs typically require an application.

Applying for Mortgage Loan Modifications

Borrowers and settlement parties can find information on mortgage loan modification programs through government sponsored websites. A mortgage loan modification application will include a borrower's financial information, mortgage information and specific details on their hardship situation. Each program will have its own qualifications and requirements. Qualifications are typically based on the amount the borrower owes, the property being used for collateral and specific features of the collateral property. When a borrower has been approved from a specific program, the approval will include an offer with new loan modification terms.

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