What Is a Loan Modification and How Does It Work?

by Michael H. Schwartz
Woman watching on her monitor the mortgage loan modification form.

In simple terms, a loan modification is just like it sounds.

It is a negotiation with your mortgage lender to create a new agreement that modifies the original terms of your mortgage. If you have a long-term inability to pay your mortgage, a loan modification could be an option if you wish to keep your home.

A loan modification typically involves contacting the servicer for the lender (the company that sends you the mortgage statements each month) and negotiate to lower the interest rate on your mortgage, which will reduce the monthly payment.

If you have arrears on your mortgage, a loan modification could also lengthen the loan, add the arrears and any past-due amounts out over time. This can also reduce your mortgage payments. This is known as “re-capitalization.”

Some loan modification programs will allow borrowers to go through “re-amortization,” which means artificially lengthening the repayment period for the loan, thereby reducing the monthly payment. The actual amount of the loan amount does not change, and the balance of the unpaid mortgage is put at the end of the mortgage.

A loan modification is different from a forbearance agreement. While forbearance provides short-term relief for homeowners who have temporary financial problems, a loan modification agreement is a long-term solution for homeowners who may never be able to repay their existing mortgage loans.

A loan modification may be an alternative to filing bankruptcy or going through a foreclosure. If a homeowner is facing foreclosure, it damages their credit, and they may not be able to buy another house for several years.

If foreclosure is a possibility, it is essential to get the modification process moving, as it might put a stop to the foreclosure before it starts.  Otherwise, you may lose your home before you have a chance to modify the mortgage.

Negotiating with the bank for a modification of your home loan can be an overwhelming process for many homeowners. You need an experienced debt relief attorney to assist you with this complex process of negotiation and fight for you.

Who Is Eligible for a Loan Modification?

Any homeowner with high combined mortgage debt compared to income, or an individual who is “underwater” (a combined mortgage balance higher than the current market value of the home) may be eligible for a loan modification.

To be eligible for a loan modification, you must do the following:

  • State why you cannot make your current mortgage payment due to some financial hardship.
  • Provide all required documentation to the lender for evaluation.
  • Complete a trial period to show that you can afford the new monthly payment.

Required documentation for a loan modification usually includes a formal application, pay stubs, financial statements, proof of income, bank statements, and tax returns, as well as a hardship statement.

How Long Does a Loan Modification Take?

Sometimes a lender or servicer will offer you a “streamlined modification.”

The servicer picks an amount they believe you can afford and that they will accept as a monthly payment, offer it to you and upon three successful payments, your loan is modified.

If the lender or servicer does not offer a streamlined loan modification, the process will depend on the mortgage lender, the ability to work through the procedure with your lawyer and other factors.  The loan modification process could take to 3-6 months.

How Does a Loan Modification Affect Your Credit Score?

Some lenders might report a loan modification as a debt settlement, and this may have an adverse impact on your credit.

If your credit score is already low and you are already behind on your mortgage, the impact to your credit may be minimal. But, if you have a high credit score, a reported debt settlement on your credit report could significantly impact your credit score. To protect your credit, you should ask your lender how they plan to report the modification to credit bureaus.

Once the loan modification is set, making timely payments will improve your credit since these payments will be reported to the credit bureaus. Eventually, your credit score will increase as each payment will build a solid credit history.

Why Do I Need an Attorney for Loan Modification?

Attempting to modify your mortgage is like a part-time job. The paperwork is exhaustive and not so easy to understand. Unlike applying for a mortgage, the servicer or lender will not assist you.   An experienced lawyer can guide you through the loan modification process.

There are also numerous situations where homeowners were led to believe that the bank was working with them on a loan modification and trying to help them avoid foreclosure, but the bank foreclosed on their property anyway. If your mortgage lender is pursuing foreclosure while also deciding on your loan modification application, or if they are in violation of federal and mortgage service rules, a lawyer can help you enforce your rights.

If the lender denies your modification request, you will need more time and assistance to appeal. An attorney can show why the loan servicer made a mistake in dismissing the loan modification application and may be able to push for approval of your modification request.

Contact a Loan Modification Attorney Today

If you are unable to make your monthly mortgage payments or are facing foreclosure, foreclosure defense lawyer Michael H. Schwartz, P.C. can help. His record speaks for itself.

Mr. Schwartz can communicate with mortgage lenders and effectively negotiate with them. Having an experienced attorney on your side means that you have an ally who is committed to your interests, not those of outside investors.

With over 40 years of experience, the law firm of Michael H. Schwartz, P.C. has provided quality legal representation to homeowners in Westchester, Rockland, Putnam County, the Hudson Valley, and New York City.  Contact us by phone or online for a free consultation today.

Michael H. Schwartz is the largest filer of bankruptcy cases for people living in Westchester and Rockland counties in New York. A graduate of New York Law School, Michael has been licensed to practice in New York State courts since 1983. He is also licensed to practice in the U.S. Bankruptcy and District Courts for the Southern, Eastern and Northern Districts of New York and the District of New Jersey as well as the Second Circuit U.S. Court of Appeals. He is a graduate of Max Gardner’s Bankruptcy and Veterans’ Boot Camps. Several media outlets have reported on his cases or sought his insights, including The New York Times.