What is a Loan Modification in Layman’s Terms?

“What is loan modification?” is certainly the question buzzing among homeowners across the country. As loan modification seems to be the option that is most supported by Obama’s Home Affordable Program for those worried about losing their homes, people are wondering just what is loan modification and how does it work.Before delving into what it is and how it works, it’s important to know what it is not: A catch-all home saver. There are people seeking modifications that think getting one wipes clean all of their responsibilities, and that is simply not true.The only way to get a mortgage modified is to express that you are willing to work with your lender and then do it. Lenders know when you’re jerking their chain and do not approve people who they do not think will come through on their part of the deal. The lender lowers your interest rate, and you make your payments – that’s the deal.Lenders don’t want you to go into foreclosure, but giving a modification does make them lose money. The only way they approve is if they are sure you are going to at least pay them the new, lower amount.So what is loan modification and how does it work? Your interest rate is lowered to an amount that you are able to handle, based on your debt to income ratio, property value, and credit. Some lenders also offer to clear part of the principle in their loan modification packages. Contrary to popular belief, a loan modification is nothing like refinancing, which is taking out a new loan to get some cash back. A modification simply alters your mortgage to a lower, fixed interest rate.Lenders decide whether to grant a homeowner a modified loan depending on a variety of factors, and none of them have the same criteria. Almost all lenders look at the value of the home, credit, debt to income ratio, date the initial mortgage was taken out, whether it is the place of residence, and mortgage payment history. They all look at the same factors, but they are looking for different things.It’s no secret that a loan modification can be helpful, but getting one can be difficult due to the rigid requirements lenders have on them. However, a homeowner may choose to either try to get one on their own or hire a professional or attorney to help with the application and negotiations.Whatever the method to get it, whatever the interest rate you’re hoping for, you no longer need to ask “What is loan modification?”

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