What Is a Mortgage Modification Loan?

Definition of Mortgage Modification

Modification in real estate refers to changing or altering the original terms of a home loan. Homeowners would ordinarily have to refinance their mortgage loan to change the interest rate, monthly payment or mortgage term. By means of mortgage modification, owners receive better rates and payments without the hassle of applying for a new home loan.

Mortgage modifications benefit owners who can't qualify for mortgage refinancing. Refinancing mirrors the original home loan process. This involves finding a lender, completing a home loan application and waiting for a lender to approve the request. Owners with low credit scores and those who experience employment or income issues may not qualify for a refinance. Rather than let these individuals get behind on their mortgage payments and risk foreclosure, lenders provide a service known as modification, wherein they reduce the interest rate and payment on the loan to increase affordability.

Not everyone meets the guidelines or qualifications for modification help. Borrowers with good credit ratings (680+) and those who are current on their mortgage payment can refinance to acquire better rates and a lower payment. Mortgage lenders reserve modifications for owners who have a higher risk of foreclosure. This includes owners who are already behind on their payments, and those who are likely to default on future payments due to income issues.

Lenders do not approve mortgage modifications without first considering a borrower's income and debt payments. Lenders will look at a borrower's current income (paycheck stubs and banking statements) and ask borrowers to provide a list of their monthly expenses. Next, lenders review how much a borrower pays toward their home loan each month. If monthly payments exceed 31 percent of their income, borrowers are a good candidate for a mortgage modification.