What is modification?
Modifications are changes lenders make to an existing loan, resulting from the borrower’s inability to repay the loan. Lenders might reduce the borrower’s interest rate, extend the terms of a loan and lower the payment, convert the loan to a different type of loan or a combination of any of the three.
When borrowers default on loans, this costs lenders money. Therefore, lenders are sometimes willing to modify loans to avoid incurring the costs of borrowers defaulting.
Loan modifications should not be confused with forbearance agreements. Forbearance agreements do not change the terms of the loan. Instead, they provide short-term relief by allowing borrowers a period of nonpayment.
Mortgage modifications are changes made to existing mortgages. To modify a mortgage, the homeowner is required to complete an application and to document their income, expenses, assets and hardship.
The most popular U.S. mortgage modification is the Home Affordable Refinance Program. HARP was established by the U.S. government in 2009 in response to the housing crisis.
Borrowers with mortgages backed by Fannie Mae or Freddie Mac who are struggling to keep up with payments may be eligible to modify their mortgages through this program. The Home Affordable Modification Program offers modifications to homeowners with mortgages backed by the Federal Housing Administration (FHA).
Curt and Jane obtained a 30-year mortgage for $300,000, planning to live in their home indefinitely.
Ten years later, Jane suffered a stroke and is now limited to part-time work. Due to the drop in Jane’s wages, the couple cannot keep up with their current house payment of $2,500.
Their mortgage company agreed to modify the terms of their loan, extending the contract for an additional seven years. This lowered the price of their monthly payments to $1,800, which the couple can afford. By modifying the mortgage, the lender is reducing the likelihood the couple will default on their mortgage. In turn, Curt and Jane can stay in their home.
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