A loan modification is changing the terms to an existing loan made by a lender because a borrower's financial hardship has made their monthly mortgage payment unaffordable. Mortgage modifications usually involves a lower interest rate on the loan, a longer term on the loan, principal reduction on the balance of the loan, a different type of loan or any combination of the 4 possibilities. Lenders would want to modify the existing terms of a loan because the cost to do it is less than the cost of foreclosing on the homeowner's property.
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A loan modification agreement is a permanent resolution to a borrower, who cannot afford their monthly mortgage payment due to financial hardship. It is provided to homeowners who will never be able to repay the loan under the current terms and circumstances they are in. A forbearance agreement provides short-term assistance for borrowers who have temporary financial problems such as unemployment.
A mortgage modification will only be approved by your lender if you have a legitimate financial hardship and if your income and expenses fit the bank calculation. The basics of the calculation the bank will use is based on if your mortgage payment is over 31% of your gross monthly income. Your gross monthly income is your income before you pay taxes. If your payment is over 31% of your gross income, then you could potentially have your mortgage payment reduced so it no longer is. Your lender will request you to submit your income and expenses, backup documentation to support these numbers and a hardship letter, which will explain how and why you cannot afford the current payment.
There has never been a time in history where banks have been more willing to modify loans for borrowers, who are facing financial difficulties. When the housing market crashed it led our economy into a recession and many homeowners struggling to be able to afford their monthly mortgage payments. One of the major causes for the housing crash was so many borrowers being approved for loans they should have never gotten. During the years of 2002-2007, sub prime loans that were given out by mortgage brokers to people, who shouldn't have qualified to get them in the place. Now all of those bad loans have to be modified to the conventional 30 year fixed, where the mortgage payment does not supersede 31% of your gross monthly income. The government is also pressuring banks to help homeowners that are facing foreclosure, or are in sub prime loans. This will continue to go on for several years to come because there are millions of Americans that need help. The only problem is that the banks have not helped as many homeowners as they should, therefore leaving millions of loan modifications that still have to get approved.
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