Loan modification is an option many borrowers use when they fall behind on mortgage payments and want to avoid foreclosure. Borrowers can modify their loan either before they stop making payments or after they default on the loan. Modifying before default helps save borrower credit and is advisable, but borrowers must prove their financial difficulties before the lender will consider this option. A loan modification can have several different results depending on the negotiation between the lender and borrower. After a brief trial period, the modification to a loan will become permanent in a new, signed contract.
Modifying Rate
When lenders modify a rate, they change the rate so that the borrower does not have to pay as much interest. This means lowering the interest rate down from its current position; a lower rate will be applied to the same principal amount, creating a lower payment for the borrower. This reduces the amount of profit that a lender makes but can be very beneficial to borrowers who are struggling making their monthly payments.
Modifying Payments
Lenders will also often agree to modify the loan payments themselves. In this case, lenders may lengthen the mortgage so that the payments are spread out over a longer period of time, lowering the payment amount per month. At other times, lenders will only place late payments back into the mortgage in order to make it current again and easier for the borrower to maintain.
Debt Forgiveness
Some loan modifications end in debt settlement, where the lender agrees to forgive all or part of the loan debt. This is more common when the borrower is in serious trouble and uses a loan consolidation, paying off old debts with a new loan such as a refinance. Sometimes borrowers will fully pay off the loan to close the account, but at other times the borrower can only make a partial lump sum payment. The lender may accept this payment and close the loan account in order to end the problem completely.
Temporary Modifications
While most types of loan modification become a permanent part of the loan after the trial period, or end the loan entirely, some types of modification are temporary and may be better options for borrowers who are not yet late on their payments. A common temporary action is a forbearance, where the lender stalls the loan and does not require payments for at least several months, allowing time for the borrower to recover from a financial crisis, then resuming payments according to the old schedule.
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