What is a Mortgage Modification?

Mary McMahon

Mortgage modification is a technique which is used to make a mortgage loan more manageable for someone who is struggling to keep up with the mortgage payments. It involves a permanent change to one or more of the terms of the loan which allows a borrower to stay in his or her home and keep up on the loan, rather than forfeiting the home to foreclosure or short sale proceedings. This option is generally only available to borrowers who are in serious financial trouble, rather than to people who simply want to refinance a mortgage to get better terms.

Homeowners who are struggling with their mortgage payments can get more favorable terms with a modification.
Homeowners who are struggling with their mortgage payments can get more favorable terms with a modification.

In a mortgage modification, the borrower works with the lender to arrive at new terms which will satisfy both parties. An attorney or mortgage broker may work with the borrower to smooth the proceedings, and to make sure that the borrower is fairly represented. Borrowers who are not familiar with the financial world can often benefit from an attorney or financial adviser who can ensure that the mortgage modification results in a loan which will be better for the borrower.

A mortgage modification is for needy borrowers, not homeowners who want to refinance their mortgage.
A mortgage modification is for needy borrowers, not homeowners who want to refinance their mortgage.

One way to change a mortgage is for the borrower to agree to write down the principal. This type of mortgage modification may be used when someone owes more than a home is worth. In this instance, the bank realizes that it will not be able to recover the full amount of the loan, and agrees to reduce the principal, with the borrower agreeing to repay the renegotiated loan or face serious consequences.

Mortgage modification may also involve a reduction in interest rate to make the monthly payments more manageable, or the creation of a fixed interest rate, rather than a variable one. The lender may also agree to temporarily suspend payments for financial hardship as part of the terms of the mortgage modification. The goal from the point of view of the borrower is to renegotiate a mortgage so that it will be affordable, while the bank wants to avoid the hassle of a defaulted mortgage and subsequent repossession and auction proceedings.

If a borrower feels that he or she needs a mortgage modification to stay on top of the payments, action should be taken immediately. Most lenders will not negotiate with borrowers who have missed payments, defaulted on their loans, or made incomplete payments. As soon as a borrower recognizes that there is a problem, he or she should reach out to the bank for assistance to see if an amenable agreement can be reached to resolve the situation.

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