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Foreclosure processMissed payments

Loan Modification

Also called Mortgage modification, Loan mod

In short

A loan modification is a permanent change to a mortgage's terms, such as a lower rate, longer term or added past-due amounts, that a lender agrees to so a struggling borrower can afford payments.

Who approves it
The lender or servicer
Common changes
Rate, term or principal deferral
Usually starts with
A trial payment period
Effect on foreclosure
Can stop or pause it

Where it fits in a foreclosure

Loan Modification belongs to the missed payments stage.

  1. 1Missed paymentsThe owner falls behind; the servicer sends notices and may offer workout options.You are here
  2. 2Pre-foreclosureA notice of default or lis pendens is filed. The owner can still sell, catch up or negotiate.
  3. 3AuctionThe property goes to a public sale, usually for cash, as-is and often without an inspection.
  4. 4Bank-owned (REO)If no one outbids the lender, it takes the property back, clears most title issues and lists it.
  5. 5ResaleA buyer or investor purchases, repairs and occupies, rents or resells the home.

How a modification works

The borrower applies to the servicer with income, expense and hardship information. If eligible, the borrower typically makes a few reduced payments during a trial period. If those are made on time, the modification becomes permanent and the loan is re-amortized under the new terms. See amortization for how payments are recalculated.

What can change

  • Lower interest rate
  • Longer loan term, such as extending to 40 years
  • Past-due amounts added to the balance
  • Part of the principal deferred to the end of the loan, or occasionally forgiven

Modification and foreclosure

Federal servicing rules generally limit a servicer's ability to move forward with foreclosure while a complete modification application is under review, though the details depend on timing. A modification can end a pre-foreclosure, which is why pre-foreclosure listings often disappear. Program rules differ by loan type, such as FHA, VA or conventional.

Example

A modified payment

A borrower owes $230,000 at 7.5% with 25 years left, paying about $1,700 a month in principal and interest. After a job loss, the servicer approves a modification that adds $9,000 in arrears to the balance, cuts the rate to 5.5% and extends the term to 40 years. The new principal and interest payment is roughly $1,230, about $470 less per month.

Loan Modification vs. Forbearance

Loan Modification

A loan modification is a permanent change to a mortgage's terms, such as a lower rate, longer term or added past-due amounts, that a lender agrees to so a struggling borrower can afford payments.

Forbearance

Forbearance is a temporary agreement in which a mortgage servicer lets a borrower pause or reduce payments during a hardship. The skipped amounts must be repaid or resolved later.

The differenceForbearance temporarily reduces or pauses payments, and the missed amounts must be resolved later. A loan modification permanently changes the loan's terms.

Frequently Asked Questions

Related terms

ReinstatementForeclosure processReinstatement is bringing a defaulted mortgage current by paying all past-due payments, late fees and foreclosure costs in one lump sum, which stops the foreclosure and restores the original loan.RefinanceMortgages & financingTo refinance is to replace an existing mortgage with a new one, usually to get a lower rate, change the loan term, or take cash out of the home's equity.Pre-ForeclosureForeclosure processPre-foreclosure is the period after a lender files a default notice or foreclosure lawsuit but before the property is sold at auction. The owner still holds title and can sell or catch up.AmortizationMortgages & financingAmortization is the process of paying off a loan with regular, fixed payments over time. Early payments go mostly to interest; later payments go mostly to principal.MortgageMortgages & financingA mortgage is a loan used to buy real estate, secured by the property itself. If the borrower stops paying, the lender can take the property through foreclosure to recover what is owed.Short SaleForeclosure processA short sale is the sale of a home for less than the amount owed on its mortgage, with the lender's approval. The lender agrees to accept the reduced proceeds to avoid a foreclosure.Deed in Lieu of ForeclosureForeclosure processA deed in lieu of foreclosure is an agreement in which a borrower voluntarily transfers ownership of a home to the lender to settle the mortgage and avoid the foreclosure process.Notice of DefaultForeclosure processA notice of default (NOD) is a public notice, recorded with the county, stating that a borrower has fallen behind on a mortgage or deed of trust and that the lender may move toward foreclosure.

Learn more in the knowledge base

What Is a Pre-Foreclosure? How the Stage Works for BuyersGuide · 7 min readPre-foreclosure is the window between a lender starting foreclosure and the home being sold at auction. The owner still holds title and still has options, so any purchase is a negotiation with the owner rather than a bid or a bank sale. This guide explains how the stage starts, how it ends and how it compares with auctions and bank-owned homes.Approaching Distressed Homeowners Ethically in Pre-ForeclosureGuide · 7 min readHomeowners in pre-foreclosure are under real stress, and they have more options than selling to you. Buyers who are honest, respect those options and follow state rules for distressed-property purchases can make fair deals without exploiting anyone. This guide covers how to do that and which patterns to avoid.How to Buy a Pre-Foreclosure Home: A Step-by-Step GuideGuide · 6 min readBuying a pre-foreclosure means negotiating with an owner who is behind on the mortgage, before the lender sells the home at auction. The deal can close as a normal equity sale or as a short sale that needs the lender's approval. This guide walks through each step, from research to a clean closing through escrow.
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Disclaimer: The information on this page is for general educational purposes only and is not legal, financial, tax or investment advice. Laws, lending rules and market conditions vary by state and change over time, and any figures shown are estimates. Before you buy, sell, finance or bid on a property, consult a qualified attorney, financial advisor, lender or licensed real estate professional about your situation.