How Does a Loan Modification Work Exactly?

Thousands of homeowners are trying to get loan modifications, but many of them are a little left in the dark and wondering how does a loan modification work. But knowing how they work is only half the battle towards receiving one.

In order to qualify for a modification on their mortgage, homeowners have to fit into the lender's requirements, which can be much more difficult than it initially seems. Every lender not only has their own set of requirements on top of the ones set by the Home Affordable Modification Program, but in most cases those requirements are not flexible.

All lenders require that the property whose mortgage is to be modified be the borrower's place of residence -- absolutely no other property will be considered. Also, and property must be valued below $795,250 dollars in order to be eligible.

The most glaring key point on how does a loan modification work is that the homeowner requesting it must be going through a period of financial hardship. No lender will even consider a mortgage for modification if they do not actually need it. This is because a modification is a last ditch effort before foreclosure: If a homeowner can't afford their mortgage and is about to be foreclosed on, a modification will make it affordable. Meaning the homeowner stays in their home and the lender does not lose tens of thousands of dollars.

Loan modification means essentially the same thing on the side of the bank and the borrower: Saving money.

While lenders do have their own individual requirements as well as the ones set by the Home Affordable Modification Program, they are looking for their own customized factors that show if a homeowner is too high of a risk or not.

If during the application process the financial future looks bleak for the homeowner or they don't seem like they would be able to handle even the new interest rate, they will probably be denied. Lenders determine the ability of the homeowner to pay be looking at their debt to income ratio, their most recent pay stubs and bills, as well as their income tax statements and the possible future prospects of the homeowner (as stated in the hardship letter).

All of this is looked at to possibly give a lower interest rate, which could help families across the country. So before wondering "How does a loan modification work," wonder whether you fit into your lender's requirements.

Emma Lanier, "Home Loan Modifications Guide", Mortgage Lending Modifications