What Is a Loan Modification Program

Are you looking for an answer to the question, "What is a loan modification program?" This term is discussed frequently as a possible option for people who are having problems meeting their monthly mortgage payments. If you're struggling with the responsibility of keeping up with your home loan, finding out what loan modification means, and whether or not participating in such a program might be beneficial to you, is certainly a good idea.

Modifications May Help Prevent Foreclosure

In order to understand what is a loan modification program, it's important to look at the basics of how mortgage loans work. When you finance a home, you are agreeing to repay the loan based on conditions as specified in the mortgage documentation you sign. For example, when you take out a mortgage loan, you are agreeing to pay a particular interest rate for the money you are borrowing to purchase a home. With some loans, the interest rate is fixed over the life of the loan, and in some circumstances the rate is variable, with the time frames and conditions under which the rate will fluctuate up or down being specified in the terms of the agreement you enter into with the mortgage lender.

You'll also agree to make a certain payment each month. You'll receive an amortization chart that shows how the money you pay in each month will be allocated among principal, interest, and your escrow accounts. The length of time you have to repay the loan is also specified when you borrow money to purchase a home. In most circumstances, home mortgage loans have a 15-year or 30 year term. The documentation will specify if there are any penalties for early repayment of funds, should you choose to do so, as well as the costs and consequences associated with failure to meet the monthly payment obligations.

When borrowers apply for a mortgage, lenders perform complicated calculations designed to determine whether or not the individual can actually afford the loan. Lenders look at a variety of factors before approving a loan, including checking an applicant's credit history, verifying current employment, and other key indicators believed to be related to whether or not the person is likely to be able to repay the funds borrowed.

Of course, at the time the loan is made, protections are put in place for the lender to ensure that the property financed reverts to the lender if the borrower fails to honor the terms of the agreement. This means that – in a worst case scenario – the lender can foreclose on the property and take possession of the home if the individual who takes out the mortgage does not repay the funds in a satisfactory manner.

While lenders do have the right to foreclose on homes if borrowers fail to make payments per the terms of the original agreement, in some cases a loan modification program might be a viable option. If your financial circumstances change after purchasing a home, you may find yourself unable to keep up with the terms of the loan you currently have.

For example, if you were to lose your job and have to accept a position with lower pay, you might not be able to keep up with your monthly payments. In this situation, if you were able to reduce your payments by extending the term of the loan, you might be able to keep up with the payments. Consequently, a loan modification could be a win-win option for you and the lienholder on your home.

If you have good credit and are still current with the loan you have, refinancing might be an option for you. However, there are fees associated with refinancing your home so it is expensive. And, if you have already fallen behind on payments, it's likely that you won't even qualify for a refinance. Rather than seeking a refinance, it might be better for you to approach your current lender and inquire about the possibility of a loan modification.

Loan modifications involve making some type of change to the loan – such as the interest rate or repayment term – that results in a lower payment. Lenders are under no obligation to allow borrowers to modify the terms they agreed to at the time the loan was made, but in many cases doing so is in the best interest of the lender as well as of the homeowner. Rather than losing your business to another lender if you refinance -or worse, having to go forward with foreclosure proceedings if you aren't able to get another loan or keep up with the one you have- the lender just might be agreeable to a modification. Keep in mind that a modification will only be considered if you can demonstrate that you do have the ability to repay the loan under the revised terms.

If you are facing financial difficulties – either due to a change in your employment situation or a steeply increasing adjustable rate mortgage – seeking information about home loan modifications is certainly a good idea. The time to request assistance from your lender is sooner rather than later. If your loan is with a company that will entertain the possibility of changing the terms of your loan, your chances of reaching an agreement are much better if your track record indicates that you consistently make efforts to keep up with your payments and to keep the lines of communication open between yourself and your mortgage lender.

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