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03. What to expect from a Loan Modification

Lower monthly payments

The main purpose of a loan modification is to lower the monthly payment to a level that the borrower can afford, so that they will be able to stay in their home. This can be done through either a modification to the interest rate, and terms, meaning the length of loan and whether the rate becomes fixed or variable.

Penalties and missed payments

Mortgage loans, as other types of installment loans, are structured so that all payments must be received, on-time, throughout the life of the loan. Any and all missed payments and fees must be caught up for the loan to be considered current. In a loan modification, the fees, and any missed payments, must be accounted for, to get the loan current, and can be incorporated into the modification.

The structure of a loan modification

Loan modifications can be structured where they either reset the payment for a specific period of time, or make more permanent modifications.

Impacts on a borrower’s credit report

A loan modification, depending on how it is structured, and reported to the credit reporting agencies, may or may not have an impact on a borrower’s credit. Late mortgage payments though, independent of any type of loan modification, will always have an adverse impact on a borrower’s credit.

Should borrowers, regardless of their credit, find themselves in a position where they anticipate a payment increase beyond their means, as in the case of an adjustable rate mortgage adjustment, they should contact their lender immediately and explain their situation.

This is to help keep their existing credit intact. Whether they decide to do either a loan modification, or a refinance, avoiding missing and late payments is the goal.

The one instance where there might be an impact on the borrower’s credit would be in the case of a principal reduction, if the lender agrees to it. A principal reduction is considered a write down, in that while the lender has no expectation of recouping this money, it would involve a lower overall cost for them than going through the foreclosure process and having to sell the property.