What is a Loan Modification and How Does it Work?

A loan modification is the restructuring of a preexisting mortgage in an attempt to prevent foreclosure. These modifications typically consist of either lengthening the life of a mortgage and therefore reducing the monthly payment, or the modification may consist of lowering an inflated variable interest rate. As a result of the current economy and increased interest rates on variable loans mortgage modifications are becoming commonplace. Typically it is not the mortgage company that recommends the modification but rather the result of a request by the homeowner who is trying to avoid foreclosure.

This request will come in the form of a formally written mortgage modification hardship letter. The mortgage company is not in the business of restructuring mortgages, nor will they automatically approve a request for a mortgage modification. Many lenders in fact, have stringent guidelines regarding who can be approved for a modification. Mortgage modifications were not created with the intent of bailing out homeowners with unmanageable payments and soaring interest rates, rather they were originally designed to assist homeowners in avoiding fees associated with refinancing. As a result every lender establishes its own guidelines for which mortgage modifications are approved or denied. In order to improve a homeowners chances of getting a lender to approve a mortgage modification request it may be to the homeowners benefit to consult an agency that can assist in the processing of the modification request. This agency will consist of professional negotiators who have experience in working with lending institutions.

While using an agency is not required in processing a request with a lender, the bank may be more likely to consider terms arranged by an expert. If the homeowner has decided to consult an agency it will do them good to research out what agencies have the best reputation for positive results. Once the lender has elected to grant or deny a modification request the borrower is notified. If the lender rejects the request the homeowner is informed of the basis for their decision. This may be as a result of consistent delinquency by the homeowner.

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If the mortgage company approves the modification request the request is processed through the loan servicing department. Usually this modification is done without changing the amortization of the loan. These mortgage modifications may take a few payment periods to come into effect. The lender will require the homeowner to continue to make all possible efforts at meeting the original payment schedule. However in some cases the bank may make an exception to this rule and allow a deferment of payments until the mortgage modification comes into effect.

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