How Does a Mortgage Loan Modification Work?

How Does a Mortgage Loan Modification Work?
How Does a Mortgage Loan Modification Work?

The Borrower Requests the Modification

Loan modifications for mortgage loans used to be a quick way for borrowers to request a lower interest rate without going through a complete refinance. Not all mortgage companies offered loan modifications, and those that did offered them for a fee--and usually only to borrowers who had mortgages that hadn't already been packaged and sold to another company. Mortgage loan modifications have become much more common as lenders try to find creative ways to assist struggling homeowners in keeping their homes instead of falling into foreclosure. Modifications used to merely lower the interest rate, but the newer version offered by some lenders can switch an adjustable-rate mortgage into a fixed rate. Lenders might suggest this as an option to homeowners, but more often than not it is the borrower who requests a mortgage loan modification when it becomes obvious that the current loan is not manageable.

The Lender Considers the Request

Mortgage lenders do not have to automatically approve a request for a loan modification. Many lenders have stringent guidelines regarding who can be approved for a modification and who cannot, even if the homeowner is facing foreclosure. Keep in mind that these programs were originally designed to assist homeowners in avoiding the fees associated with refinancing for a lower interest rate. They were not originally designed to bail out homeowners with unmanageable payments and soaring adjustable interest rates. Every lender sets its own standards for which mortgage loan modifications are approved and which requests are denied.

The Modification is Approved or Denied

After the loan company makes the decision whether to approve or deny the modification request, the borrower is notified of the decision. Borrowers whose requests are denied are told why the request was denied, whether it's because the borrower has consistently been delinquent with mortgage payments or the lender no longer holds the loan or some other reason. If the modification request is approved, the request is sent through to the loan servicing department and the loan is modified. Most often, a modification involves simply lowering the interest rate without changing the amortization of the loan, but different lenders offer different modification programs. Modifications can take a few payment periods before they go into effect, so it is important that borrowers continue to make payments as scheduled.