A loan modification is a process where the terms of a mortgage are modified outside the original terms of the contract agreed to by the lender and borrower. In general, any loan can be modified, and the process is referred to as loan modification or debt rescheduling.

How It Works

In the normal progression of a mortgage, payments are made according to the loan documents until the mortgage is paid in full. The lender holds a lien on the property. Any change to the mortgage terms is a modification.

Common Modifications

Changes may include any of the following:

• Interest Rate Reduction — Lowering the interest rate to reduce monthly payments
• Extended Term — Extending a 30-year term to a 40-year term to lower payments
• Principal Reduction — Reducing the principal balance of the loan
• Convertible Terms — Switching from adjustable to fixed-rate mortgages

Home Affordable Modification Program (HAMP)

Following the 2007 real estate recession, the government mandated the Making Home Affordable (MHA) program. Under this program:

• The lender receives a fixed interest rate
• The borrower gets a lower loan payment
• Often includes an extended term
• Sometimes includes principal reduction if the property is "upside down"

Is It Right for You?

Loan modification is ideal for homeowners who:

• Have experienced a significant reduction in income
• Have a hardship that is permanent or long-term
• Want to stay in their home long-term
• Can no longer afford their current mortgage payment