What is a Mortgage Loan Modification?
Owning a home can be challenging, especially when it comes to your finances. If you are a homeowner who is struggling to make your mortgage payments, your lender may be able to offer you something called a mortgage loan modification.
Definition of a Mortgage Loan Modification
A mortgage loan modification is a change in the terms of your existing home loan (sometimes referred to as your original mortgage agreement). A mortgage loan modification is designed to help homeowners with financial difficulties by making their mortgage payments more affordable or restricting the amount you are behind on the payments. By adjusting the terms of your current mortgage, and potentially lowering the monthly payments, homeowners can financially get back on track.
Types of Mortgage Loan Modifications
There are several ways that a lender may modify a mortgage. It could involve lowering the interest rate, extending the time that you must repay the balance of the loan, putting the arrears on the back of the loan, changing the type of loan, or reducing the principal balance. Here are some examples of mortgage loan modifications:
- Lower Interest Rate: One of the most common types of mortgage loan modifications, the lender can temporarily or permanently lower the interest rate on the loan.
- Partial Claim Modification: If the homeowner is behind on the mortgage payments, the mortgage company may put the arrears on the back of the loan by obtaining, on the homeowner’s behalf, a zero-interest loan from the Department of Housing and Urban Development (“HUD”) for the arrears. The homeowner becomes current on their payments; however, the amount owed to HUD will need to be paid as a lump sum by the homeowner at the end of the mortgage loan. The homeowner grants HUD a subordinate security interest in the home so HUD has a “partial claim.”
- Step-Rate Interest Rate Modification: This is when a lender lowers the interest rate for a specific period (typically five years). At the end of that time, the interest rate will adjust upward to what’s called the “interest rate cap.”
- Loan Conversion: If the homeowner is having trouble paying on an adjustable-rate loan, the lender may agree to convert it to a more affordable fixed interest rate loan.
- Extending the Term of the Loan: Mortgage lenders may extend the length of time that the homeowners must repay their mortgage. Homeowners will typically have lower payments and longer to repay, but they’ll pay more in interest overall.
- Deferment or Postponement: For homeowners with excellent payment history on their loan, the lender may offer a deferral (sometimes referred to as a forbearance). This is a temporary break from loan payments – typically, a few months. The deferred payments are usually added to the end of the loan in the form of a Partial Claim Modification
- Reduction in Principle: This is when a mortgage lender reduces the total amount that the homeowner owes on the loan, making it easier for them to pay. This is a rare modification, but some lenders do offer this option.
Challenge of Mortgage Loan Modification
When a homeowner is granted a mortgage loan modification, the lender will report it to the credit bureau as debt settlement. So, the homeowner needs to be prepared for their credit score to take a hit. However, debt settlement is not as damaging to a credit score as missed payments or a foreclosure. Foreclosures will stay on a person’s credit history for seven years, and, unlike loan modifications, may disqualify them from future loan programs.
Have Additional Questions? Contact Burrow & Associates
If you are considering a mortgage loan modification, and want to discuss your best options, please reach out to Burrow & Associates at (678) 323-2394. We’ll help you take a proactive approach with your mortgage servicer and work on getting your finances back on track.