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.
How Loan Modification Works
Although loan modifications may occur with all types of loans, they are most common with secured loans, such as mortgages. 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 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.
[Important: Loan modifications are most common with secured loans, such as mortgages, and usually involve a reduction in the loan's interest rate, an extension of its length of maturity, a different type of loan or a combination of these three aspects.]
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 Modification
Mortgage loan modifications are common in the credit market since larger sums of money are at stake. During the housing foreclosure crisis that took place between 2007 and 2010, several government loan modification programs were established for borrowers. The Home Affordable Modification Plan (HAMP) was one leading program, introduced under the Making Home Affordable program; it, along with the Home Affordable Foreclosure Alternatives Program (HAFA), expired at the end of 2016 for new modifications. Current loan modification programs include those from the U.S. Dept. of Veterans Affairs, the Federal Housing Administration and Fannie Mae (which also offers disaster relief modifications). Traditional lenders may have their own loan modification programs as well. All of these programs typically require an application.
Applying for a Mortgage Loan Modification
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. Learn more by consulting the websites of the U.S. Dept. of Veteran's Affairs, Federal Housing Administration and Fannie Mae.
When a borrower has been approved for a specific program, the approval will include an offer with new loan modification terms.