Definition of Loan Modification
Loan modification is the process of altering the original terms of a loan agreement between a lender and borrower. These modifications typically result from mutual consent between the involved parties and are often designed to provide relief to the borrower, who may be struggling to meet the original payment terms. Common modifications include changes to the interest rate, the loan term, or the repayment schedule. Loan modifications are frequently employed to prevent foreclosure and help borrowers maintain ownership of their property.
Examples of Loan Modification
Example 1:
Scenario: Sarah faced unforeseen medical expenses that made it difficult to keep up with her mortgage payments.
Loan Modification: Her lender agreed to temporarily lower her interest rate for six months while she recovered financially. At the end of this period, the reduced payments Sarah made were added back to the remaining loan balance.
Example 2:
Scenario: John lost his job and anticipated that it would be a few months before he could find new employment.
Loan Modification: John’s mortgage lender allowed him to defer two monthly payments. During this time, the accrued interest was added to the loan balance, and when John resumed employment, he started with higher monthly payments to account for the missed payments and accrued interest.
FAQs about Loan Modification
What types of loans are eligible for modification?
Most commonly, home mortgages are eligible for loan modification. However, other types of loans including auto loans and student loans can also qualify under specific conditions set by the lender.
How can a borrower qualify for a loan modification?
Qualification criteria vary depending on the lender. Generally, borrowers must provide proof of financial hardship, detailed reasons for inability to meet the current loan terms, and documentation of income and expenses.
What is the difference between loan modification and refinancing?
Loan modification adjusts the terms of an existing loan, while refinancing involves replacing an old loan with an entirely new loan, usually with different terms.
Will a loan modification hurt my credit score?
A loan modification could have a temporary negative effect on your credit score, but it is often better than the long-term impact of foreclosure or default.
Are there fees associated with loan modification?
Some lenders may charge a fee for processing a loan modification; however, there are programs and advocacy groups that may assist with the modification process at no cost.
Related Terms
Foreclosure
The legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments, typically by selling the property used as collateral for the loan.
Mortgage
A type of loan specifically used to purchase real estate, where the property itself acts as collateral for the loan.
Accrued Interest
The accumulated interest on a loan that has not yet been paid by the borrower.
Workout
An agreement to restructure or modify the terms of a distressed loan with the intent of avoiding default or foreclosure.
Online Resources
- Federal Trade Commission on Loan Modification Scams
- Making Home Affordable: Official Program of the U.S. Treasury Department & the U.S. Department of Housing and Urban Development
- Consumer Financial Protection Bureau: Mortgage Help
References
- Federal Trade Commission. “Mortgage: Preparing and Closing the Loan.” Retrieved from FTC.gov
- Consumer Financial Protection Bureau. “Mortgage Help: Resources and Tips.” Retrieved from consumerfinance.gov
Suggested Books
- “The Loan Modification Guide: For Homeowners And Real Estate Professionals” by Anna Cuevas
- “Foreclosure Prevention Rock Star”: Techies Guide To Loan Modification Success" by Kevin Sayles
- “Avoiding Foreclosure: The Field Guide to Short Sales, Loan Modifications and Cash-for-Keys Deals” by John Mauldin
