Home loan modification defined

January 8, 7:44 AMSF Personal Finance ExaminerSylvia DeFrance

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In this down economy, many homeowners are finding it difficult to make ends meet.  Whether the mortgage reset forcing higher payments, job loss, salary cuts or a combination of financial stressors, homeowners are looking to mortgage modifications as a way to stay in their home.

While foreclosure or a short-sale are options, both hurt your credit score which will make it difficult to rent or borrow money in the future.  At the very least it will make these tasks much more expensive.  And for many people, staying in their home for the long-term is the objective and loan modification is a potential pathway to the goal.

What is home loan modification?
Loan modification comes in many flavors taking into account your personal financial situation, payment history, overall debt load, earnings and the current value of the home.  It also depends on if the property is your primary residence, a second home or an investment property.  At this time, most loan modifications are for primary residence properties only.

Under loan modification, the financial terms of the loan - typically the interest payment - are modified in the short-term to assist the homeowner in making payments and then "stepping up" to a more conventional loan over time.   The lender may offer modification similar to the following:

• Year 1 - 1% interest only
• Year 2 - 2% interest + principal
• Year 3 - 3% interest + principal
• Year 4-30 - 5.75% interest + principal

Again, the above is only an example of what a loan modification may look like. 

There are many outfits offering loan modifications and some are scams, others are not.  In general, working directly with your lender costs nothing out-of-pocket and unlike refinancing, there are no points or fees.

Next: How to request home loan modification