What is a Loan Modification on a Mortgage?
Buying a home is a significant investment that comes with a long-term financial commitment. But what happens when unexpected financial challenges make it difficult to keep up with your mortgage? That's where a modification can come into play.
In this blog post, we'll explore the basics of loan modifications on mortgages. While reading, please keep in mind that, while they may be a viable option for some, many struggling homeowners find that a modification alone will not solve their financial troubles. For these families, bankruptcy may be the only option that allows them avoid foreclosure and keep their homes.
Defining Loan Mortgage on a Modification
A mortgage loan modification is a change made to the terms of an existing agreement between a lender and a borrower. It is a way that some borrowers attempt to avoid foreclosure by making their payments more affordable.
It is important to note that loan modifications are not guaranteed, and not all borrowers will qualify. Additionally, loan modifications may have an impact on the borrower's credit score and may not always result in a lower monthly payment or interest rate.
When it comes to modifications on mortgages, there are several different ways that your loan can be changed. We’ve outlined the primary types of modifications in the sections below.
Lengthening the Loan Term
This type of modification involves extending the repayment period, often by an additional 10 years. By doing so, the borrower can reduce their monthly payments, making them more manageable.
Reducing the Interest Rate
Another option is to reduce the interest rate, which can lower the monthly payment amount. This can be particularly helpful for borrowers with adjustable-rate mortgages (ARMs) whose interest rates have increased, making their payments unaffordable.
Reducing the Principal Balance
In some cases, the lender may agree to reduce the amount of principal owed. This can reduce the borrower's monthly payments and make it easier to keep up with their payments.
Rolling Unpaid Principal
If a borrower has missed several mortgage payments, the lender may agree to roll the unpaid principal into the overall loan balance. This can help forestall foreclosure by bringing the loan current.
Re-Amortizing the Mortgage
Re-amortization involves recalculating the monthly payment amount based on the outstanding loan balance and the remaining term of the mortgage. This type of modification can help borrowers who have experienced a change in their financial situation and need to adjust their payment amount.
When Do You Need it and How To Apply
A mortgage modification may be useful for some homeowners who are struggling to make their monthly payments. If you're considering a modification, the first step is to contact your lender or loan servicer. They will provide you with the necessary application materials and guide you through the process.
This agreement is typically used when a borrower is facing financial difficulties and needs to modify the terms of their mortgage in order to make the payment more manageable.
However, because modifications do not address homeowners’ underlying financial issues, they are often an insufficient remedy for struggling families. While reducing your monthly mortgage payment may help postpone foreclosure, if you can’t afford to make the new payment due to lack of income or other debts, you will likely find yourself in the same position just a few short months later.
On the other hand, bankruptcy can help you reduce most (if not all) of your debts, keep your home, and get the fresh financial start you so desperately need. Additionally, because modifications take months to process, they typically won’t be fast enough to stop a foreclosure that has already been initiated. However, filing for Chapter 13 bankruptcy stops the sale date for your home and allows you to pay back the arrears over time, saving your home from foreclosure when a modification might not be able to. Sign up for a free consultation with an experienced DebtStoppers attorney to learn more about what bankruptcy can do for you.