What's a Loan Modification?

A loan modification is when a lender agrees to lower the interest rate or the monthly payment (and sometimes both) on an existing mortgage.  When a borrower is behind on their payments, a lender will consider doing a loan modification as an alternative to foreclosure.

Some quick facts:

• A loan modification can be requested by the borrower, but must be approved by the mortgage lender.
• Approval is based on the borrower’s current income and monthly obligations and not on the borrower’s credit score.
• Though more difficult, when a borrower is current on their payments, a lender may consider a loan modification because of a documented hardship, such as job loss or large unexpected medical bills.

It is typically easier to get approved for an owner-occupied home with programs such as President Obama’s Making Home Affordable Modification Program.

Some lenders (Chase Bank, for example) now offer their own loan modification program.  Be sure to check with your lender for specific details.

Bottom line, a loan modification is basically a mortgage refinance – without the huge upfront costs of closing a new loan.  And, unlike with a refinance, the borrower doesn’t have to have great credit to get approved for a loan modification.

If the payments on your mortgage are more than you can afford and you would rather stay in your home instead of sell it, then a loan modification is definitely an option worth considering.