LOAN MODIFICATION
Loan Modification: Overview, Government Programs, Application
What is Loan Modification?
Loan modification is a change made to the terms of an existing loan by a lender. It may involve a reduction in the interest rate, an extension of the length of time for repayment, a different type of loan, or any combination of the three.
Such changes usually are made because the borrower is unable to repay the original loan. Most successful loan modification processes are negotiated with the help of an attorney or a settlement company. Some borrowers are eligible for government assistance in loan modification.
How Loan Modification Works
Although a loan modification may be made for any type of loan, they are most common with secured loans such as mortgages.
KEY TAKEAWAYS
- A loan modification is typically granted to a borrower in financial crisis who can't repay the loan under its original terms.
- Successful applicants typically are represented by legal or other professional counsel.
- Some consumers have access to government programs that help mortgage-holders.
A lender may agree to a loan modification during a settlement procedure or in the case of a potential foreclosure. In such situations, the lender has concluded that a loan modification will be less costly to the business than a foreclosure or a charge-off of the debt.
A loan modification agreement is not the same as a forbearance agreement. A forbearance agreement provides short-term relief for a borrower with a temporary financial problem. A loan modification agreement is a long-term solution.
A loan modification may involve a reduced interest rate, a longer period to repay, a different type of loan, or any combination of these.
There are two sources of professional assistance in negotiating a loan modification:
- Settlement companies are for-profit entities that work on behalf of borrowers to reduce or alleviate debt by settling with their creditors.
- Mortgage modification lawyers specialize in negotiating for the owners of mortgages that are in default and threatened with foreclosure.
Federal government assistance also is available to some borrowers.
