• DYE CULIK PC | Consumer Protection Division

What is a Mortgage Loan Modification?

Loan modifications have suddenly become a subject of interest to homeowners throughout North Carolina. Because of economic effects from the novel coronavirus (COVID-19) pandemic, many homeowners are asking what a loan modification is and how it can help them avoid foreclosure. This post answers both those questions.

A loan modification is defined as “a change in your loan terms.” This is the definition provided by the Consumer Financial Protection Bureau. This simple definition can be surprisingly complex, however. Start by thinking of the loan you already have – it has terms like the principal amount, interest rate, repayment term (usually 30 years), and monthly payment. These are the terms that are most often modified under a loan modification. The CFPB explains:

The loan modification can reduce your monthly payment to an amount you can afford. Modifications may involve extending the number of years you have to repay the loan, reducing your interest rate, and/or forbearing or reducing your principal balance.

As you can see, a loan modification is basically a change in one or more of the terms of your loan. To achieve an affordable payment one or more of these variables can be adjusted to reduce the total amount you are paying every month. Most loan modifications are for the duration of the life of the loan.

A loan modification is a type of what is called “loss mitigation.” Loss mitigation is a mortgage industry term covering all the options available to homeowners having financial issues. Though a loan modification is the most common type of loss mitigation sought, loss mitigation also includes options like a short sale (selling the house for less than it’s worth) or a deed in lieu of foreclosure (giving the house back to the bank rather than being foreclosed on).

How do you apply for a loan modification? The documents that are almost always required for a loan modification application are things like an application, bank statements, tax returns, paystubs, a profit-and-loss statement (for self-employed homeowners). You should think of the loan modification application process as being almost like applying for a new mortgage. Some programs require no documentation at all, though this is less common.

Will you be approved for a loan modification? If your income is reduced but you are still working, there is a good chance that you should be approved. Different formulas are used to evaluate your modification application – these depend on who owns or services your mortgage. Most of these look at your income to see if you would still be able to pay every month if your mortgage payment were reduced to a more affordable amount. In some cases, though, if there is no income, a modification may not be approved.

If you get a loan modification, what will its terms be? The answer to this question depends on who owns or services your mortgage. Different lenders use different formulas. For example, mortgage giants Fannie Mae and Freddie Mac, who own about 40% of mortgages in the U.S., offer what is called a Flex Modification. This reduces your monthly mortgage payment by as much as 20% by lowering your interest rate and extending the repayment term of your loan. Any unpaid payments are added to the principal balance, which is called recapitalization. Your loan is then brought current after a three-month trial period plan. This modification helps you to avoid foreclosure and stay in your home. Other lenders have similar programs.

This post has provided a general overview of what a loan modification is and how it may benefit you. Our office has been helping homeowners solve mortgage problems and get loan modifications for over a decade. In our experience, the most important thing is to be proactive. Some homeowners ignore lenders and do nothing, a reaction that is understandable but which does not help to solve the problem of getting their loans back on track, and which increases the risk of foreclosure.

If you are having mortgage issues, contact us to see if we can help you with a solution like a loan modification. Culik Law is a consumer protection law firm located in Charlotte, North Carolina.