The basic idea of loan modification is simply changing the terms originally agreed upon and this can apply to any kind of loan. However, in the current climate, when people are talking about loan modification they mean efforts to modify mortgage loans in order to avoid foreclosure. The basic idea is to make the borrower’s monthly mortgage payments more reasonable by lowering the amount. This can be accomplished in several different ways and in the present economic mess is frequently in the interests of both parties: the borrower and the lender. Therefore it can come as no surprise that loan modification has received a lot of attention over the last year or so.

For the borrower, the advantage is self evident: it lowers the amount due each month making it easier to maintain regular timely loan payments. Since the collapse of the real estate market, many people have found themselves locked into mortgages that are for far more than the actual property is worth. Further, the general economic slow down has resulted in many people losing their jobs, alternative streams of income, or facing other economic hardships, making their monthly mortgage payment all the more difficult. Nevertheless, most people that have purchased home recently tend to believe that the value of their property will rebound at some point and want to stay in their homes.

For the lender, the advantage of loan modification is that it can serve as a preferable alternative to foreclosure. Depending on the condition of the local real estate market, foreclosure can frequently lead to significantly larger losses than working with the borrower to ease the terms of the initial loan. In these cases, which are much more common since late 2008 and will remain common throughout 2010, the lender will often agree to some form of loan modification as long as the tangible benefit outweighs that of foreclosing on the property. With most real estate markets having bottomed out but not rising, an over abundance of houses available, and a steep decline in the number of people who qualify for new mortgages; keeping older mortgages alive – even if modified – is a good idea for many lenders.

The exact mechanics of available modification schemes differ based on the lender’s policies and practices as well as the general financial situation of both the borrower and the lender. Typically the lenders prefer loan modification programs that do not result in the overall amount owed decreasing, like extending the length of the loan or accepting a mortgage forbearance agreement. However, if the local real estate market is in bad shape and the lender is as well, a good negotiator may be able to convince the lender into actually reducing the amount owed, by reducing the interest rate or even the principal of the loan. There are other options as well, such as either waiving or stopping late fees and penalties or changing the interest calculations.

In general, loan modification is the product of negotiation between the lender and the borrower, usually initiated by the borrower. The exception to this is the federal government’s Home Affordable Modification Program (HAMP), which borrowers can learn about online at http://makinghomeaffordable.gov/.

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Any borrower can approach their lender at any time to initiate negotiations for loan modifications and generally speaking most lenders have a series of programs available. More often than not the terms can be realized if the borrower initiates negotiations before he or she fall behind in their payments, though there is nothing preventing a borrower from suggesting loan modification after they are already delinquent, or even after foreclosure or bankruptcy proceedings have begun. However, in order to qualify for loan modification under the federal government’s Home Affordable Modification Program (HAMP), there are five specific conditions that must be met.

First, the home in question has to be the borrower’s primary residence, meaning that people cannot appeal to HAMP to stop foreclosure on secondary homes, rental properties, or vacation homes. Second, the amount owed on the primary mortgage – the one the borrower is seeking to modify – has to be $729,750 or less. Third, the current mortgage has to have been obtained prior to January 1, 2009, so people with more recent mortgages do not qualify for assistance under HAMP though other options may be available.

The fourth qualification for loan modification under HAMP is that the borrower has to be having trouble paying their mortgage. This is more than merely saying so; instead the borrower has to substantiate this claim. The claimed difficulties have to be listed on the Request for Modification and Affidavit (RMA) form that initiates the HAMP process. While the RMA itself instructs borrowers not to provide lengthy explanations, once this material is sent to the lender, the lender will investigate thoroughly and expect the borrower to substantiate their claims of economic hardship. The entire process may be stopped and rejected if the borrower is not really suffering hardship.

The fifth, and final, qualification for loan modification under HAMP is that the borrower monthly mortgage payment has to be in excess of thirty-one percent of their current monthly gross income. It is important to note that this refers to gross income (the total amount made before expenses) not net income (the total amount actually brought home each month). Further, as is the case with the fourth qualification, all of this has to be substantiated. The borrower will have to provide the lender with not only comprehensive proof of all income, but also their last tax return and other documentation.

If a borrower meets all five of the conditions described above, they may qualify for loan modification under HAMP. However, unlike independent loan modification, in which the borrower and lender sit down together and thresh out an agreement, the HAMP program is structured. That is, there is a very specific process that the lender and borrower must follow in order to reach loan modification agreement that the program will fund. If the borrower has a stable income and just needs some temporary relief, he or she may be able to get a better deal through direct negotiation as opposed to using HAMP. A savvy borrower may want to consider free negotiation first and using the HAMP option as a contingency plan if the free negotiation fails.

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In a word: “yes”. In fact the entire purpose of most mortgage loan modification efforts is to reduce the borrower’s monthly payments to a more tolerable level in order to avoid foreclosure on the property. While loan modification may not be in the lender’s best interest in times of increasing property values, in times such as these – with foreclosures continuing to escalate, property values bottoming out, and market saturation – it is usually in the lender’s interest to avoid foreclosure and work with borrowers in order to do so.

Mortgage loan modification can be accomplished in many different ways. More often than not the lenders will suggest modifications that do not actually lower the amount owed, but make the monthly payments more reasonable. One of the most popular ways of doing this is to extend the length of the loan. If the loan is extended for a longer period of time, there are more monthly payments due, which means the actual amount of each monthly payment can be reduced as it is spread out over the increased number of payments. Another option popular with lenders is loan forbearance. This is an agreement whereby the borrower is allowed a period of time in which they pay lower amounts (or even no amounts) for a given period of time on the promise that they will make up these amounts at some point in the future as agreed.

Despite the fact that the lenders will rarely – if ever – recommend an agreement that results in an actual reduction in the amount owed, if such a suggestion is made by the borrower, the lender may decide to agree in order to avoid foreclosure. Therefore, depending on the exact circumstances, it may be in the borrower’s interest to ask for a reduction in the interest rate, or even a reduction of the principal owed. Whether or not a lender will agree to these terms depends on both the financial situation of the borrower as well as the lender, so nothing is guaranteed. However, if the amount of the requested reduction is significantly less than the amount likely to be realized through foreclosure, the lender may decide to agree to an actual reduction.

Other possible options include modifications to the way the interest is calculated, reducing or stopping late fees and penalties, or capping the maximum monthly payment based on the borrower’s monthly income or some other number agreed upon by both parties. The ways a mortgage can be modified is really only limited by one’s imagination, however the borrower has to keep in mind that whatever terms are proposed have to result in more money to the lender than they would realize through foreclosure. This means the existing condition of the borrower’s local real estate market has a lot to do with how much the lenders are willing to compromise. If the property is in an area where the real estate market is rebounding and property values are increasing, then the lenders will be much less likely to agree major modifications of a preexisting mortgage.

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