How does a Mortgage Modification Work

A mortgage modification is a good way to save a property that has otherwise become unaffordable, but it is important to understand how they work in order to decide if this is an option worth pursuing. In general, mortgage modifications are new mortgage loans that are made with better terms than the loan that they are replacing.

Mortgage modifications used to be fairly rare in the banking industry. In the past, as people were unable to make their mortgage payments, they were usually able to find a home equity loan that allowed them to use the equity in their home to make their mortgage payments until they were able to resume normal payments.  Because most mortgages were made with a significant down payment from the consumer, nearly all houses had some equity in them.

If a consumer had no equity in his or her property, then the bank typically choose to foreclose on the home. This was usually a sound financial decision for the bank, because a homeowner who had spent all of his or her equity most likely had long-term financial problems that would most likely prevent him or her from ever resuming normal payments on the house.

Today however, it is estimated that nearly 25 percent of all homeowners are underwater on their homes. While this is mostly the result of banks making loans to people that did not require them to have a down payment in conjunction with a plummeting housing market, it means that one in four borrowers has no home equity to access in the event that he or she can no longer make their mortgage payments.

Obviously, the high unemployment rate has put many people at risk for losing their homes, and banks cannot afford to foreclose on every homeowner who is in trouble. As a result, many banks are willing to negotiate with borrowers who are having trouble paying their mortgages. 

To get a loan modification, start by contacting the bank with which you currently have your mortgage. It may take several tries to get in touch with right department. Once you’re speaking with a loan modification specialist, explain your situation to him or her. Tell them the truth about a job loss, your savings, and anything else that they ask you.

Many people make the mistake of making their picture sound better than their reality, eliminating themselves from consideration for a modification. Other people make the mistake of making their situation sound more dire, causing the bank to believe that a modification will not ultimately help them enough to let them keep the house.

After getting your financial details, the bank will usually look at ways that it can help you. Typically modifications include lower interest rates, extension of payment terms, the ability to skip a few payments, or some combination of these three.

A family who has recently lost a breadwinner for example, might benefit from a lower monthly payment that would come about through a lower interest rate and an extension of the number of years that it will take to pay back the loan. Someone who is experiencing a temporary set-back however, might be better by just being able to have three months of his or her payments forgiven or extended.

If you decide to try for a loan modification, be sure that you understand everything that you are told. In some cases, a modification can force a person to pay more for their mortgage because they agree to higher interest rate or the fees involved in a new mortgage make the loan balance more than what was originally owed.