Loan Modification Basics
A loan modification occurs when a bank agrees to modify a borrower’s monthly mortgage payment amount to a figure that better suits their current financial picture. While the monthly mortgage payment is reduced, any arrearage, fees, and interest are added to the principal balance of the loan.
Homeowners in mortgage default can benefit from completing a loan modification in the following ways:
- Affordable monthly payments
- Able to avoid foreclosure
- Credit score preservation
- Able to remain in the property
Loan Modification Facts and Figures—Before a Seller makes a decision about which option is best, ask him or her to consider the following:
- Sixty percent (60%) of all loan modifications in 2008 were in default one year later (Office of Thrift Supervision)
- Only 40% of loans with monthly payments reduced by as much as 20% were back in default one year later (Office of Thrift Supervision) (Question—if 60% of all loan mods are in default one year later, then what percentage of all loan mods does the 40% of payments reduced more than 20%, also in default one year later, represent? What percentage of loans modified are still on track after one year?)
- Loan modifications would have a better chance of working if the principle balance was lowered (New York Federal Reserve), a loan revision that lenders are not currently making
- Thirty-two percent (32%) of loan modifications approved in the first quarter of 2010 went into re-default status after only six months (US Department of the Treasury)
