What does "Loan modification" mean?

Definition

A loan modification is a permanent change to your original mortgage terms, such as the interest rate or loan term. It's a way for lenders to help borrowers who are struggling to make payments.

Understanding Loan Modification

Loan modification often appears when homeowners face financial challenges. It allows changes to the original loan terms, making payments more manageable. Typically, this can involve adjusting the interest rate, extending the loan term, or even reducing the principal balance. Example: A homeowner's monthly payment decreases from $1,500 to $1,200 after a loan modification. It's not a refinance, which creates a completely new loan; instead, it alters the existing one. Loan modification aims to help homeowners stay in their homes without starting a new mortgage process. Loan modification doesn't automatically guarantee reduced payments for everyone.

People Want To Know

Is it hard to get a mortgage loan modification?

Lenders require documentation of financial hardship for a loan modification, including proof of income, bank statements, and expense details. Borrowers who demonstrate genuine need and provide the necessary paperwork have a better chance of approval. Contact lenders to discuss your specific situation.

How much does a loan modification lower your payment?

A loan modification can lower your monthly payment by 10% to 30%, depending on the changes made to the terms. Factors influencing the reduction include the new interest rate, loan term, and any fees or principal adjustments.

What are the rules for mortgage modification?

Lenders require proof of financial hardship for a loan modification, such as income documentation and a statement of expenses. Borrowers must also demonstrate their ability to make modified payments based on the new terms. The modification must be permanent, and borrowers may need to be at least 30 days delinquent on their mortgage payments to qualify.

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More From The Mortgage Glossary

Loan origination

Loan origination is the entire process of a lender creating and issuing a new mortgage. This includes everything from the initial application to underwriting and funding the loan.

Loan term

A loan term is the length of time you have to repay a loan, as specified in the loan agreement. Common mortgage loan terms are 15 or 30 years.

Loan-to-value ratio (LTV)

The loan-to-value ratio, or LTV, is a number that compares the amount of your mortgage to the appraised value of the home. A higher LTV, typically over 80%, may require you to pay private mortgage insurance.