What is a Loan Modification?

A loan modification occurs when changes are made to an existing mortgage loan (used to finance a house) because of the borrower’s long-term inability to repay. It is not a refinance – which is an application for a completely new loan.

Through a loan modification you can change certain aspects of your current loan with your lender, such as reducing interest rates, extending the term of the loan, or changing the mortgage type (from a fixed mortgage to a variable mortgage contract).

People modify their loans to make mortgage payments easier – especially if they are finding it hard to keep up with payments.

Loan modification is also known as debt rescheduling.

To qualify for a loan modification you should have a steady income, a positive balance sheet, and own the property you want the loan modification for.

According to the US Department of Housing and Urban Development:

“A Loan Modification is a permanent change in one or more of the terms of a Borrower’s loan, allows the loan to be reinstated, and results in a payment the Borrower can afford. Borrowers are permitted to receive a Loan Modification or FHA-HAMP only once within a 24-month period.”

Tips to get approved for a loan modification

When deciding whether a borrower is eligible for a loan modification, lenders will look at their debt-to-income ratio.

Applicants who have managed to meet their monthly payments are much more likely to be approved.

What monthly payments does the lender look at?

• Credit card minimums
• Personal credit report
• Car payments – for personal use
• Mortgage payments
• Tax and insurance

The lender does not look at tuition expenses, childcare, your cable bill or food expenses.