What are loan modifications, when is someone who owns a home likely to receive a loan modification, and how does a person go about getting a loan modification? First, let’s define “Loan modification”. Loan modifications are a lender’s terminology for the process of changing the terms of financial contracts between people who have bought a home and some lending institution, traditionally a mortgage bank, which loans money to the prospective homeowner(s) to purchase a home. The terms that are modifiable are the interest rate, the principal balance, or the term (length of the loan). Historically, loan modifications have only changed the interest rate of the loan, but in today’s market conditions given the extraordinarily high number of people who have been unable to pay their mortgages either on time or at all due to the real estate bubble; therefore, it is possible to have any or all of these terms changed/modified on a loan. The purpose of a loan modification is to make the payments affordable for a homeowner to avoid either a short sale or foreclosure.

Next, who is likely to receive a loan modification? Wouldn’t everyone want to have their mortgage payment, principal balance and/or term reduced? Obviously, the answer is yes; however, this where things get a little tricky. First, the borrower has to realize a bank is not going to change the terms of the loan out of the goodness of their heart. The interest rate which determines the income for the bank for lending the money is one of the primary vehicles a bank earns money. One thing is for sure, banks are not anxious to give away money to anyone. Therefore, before a bank will even consider doing a loan modification, the borrower will have to start missing payments or at least only be sending partial payments and therefore begin the process of falling behind on their mortgage. Most people don’t want to ruin their credit which will prevent them from getting future loans. Therefore, many people will drain their savings before they stop paying their mortgage. So, will a bank lower a person’s payment just because they are falling behind on a loan? No, highly unlikely. The bank will do a complete cost analysis before approving a loan modification. The bank will request complete financial records from the borrower, including current tax returns, bank statements, paystubs, and will require the borrower to provide a hardship letter explain why the borrower needs a loan modification. Then the bank will look at how much the house is worth versus how much the borrower still owes on the property. If the bank believes the home is worth more than the loan then the bank will simply foreclose on the homeowner, and sell it in an auction. In today’s market this is not happening often because most homes are valued less than the amount owed on the loan, so you’d think banks would be approving loan modifications left and right, if all things were equal. However, in this market, not all things are equal because Uncle Sam has stepped in with billions of dollars of bail out money for the banks. So, in today’s market the banks are being subsidized by Uncle Sam on Foreclosures. How much money is Uncle Sam subsidizing the banks on each loan, very difficult to tell, as usual the devil is in the details of each government bailout program. Bottom line, less loan modifications are being approved, because the banks can make more money or lose less money by foreclosing than if they were to do a loan modification. Another factor which makes loan modifications difficult is often banks sell the loan/paper to a third party or investor. In those cases, the bank that the borrower closed their loan with no longer has authority to change the terms of the original loan and the bank must get approval from the investor who owns the loan. Many of these loans have been sold in bulk to overseas investors, so getting approval on a loan modification for an individual can be very difficult and time consuming. In the end, borrowers can get loan modifications approved on their own, but it can be time consuming and an uphill battle for individuals to work with experienced bank loan modification experts who are trained to squeeze as much money out of a borrower as possible.