Loan Modification - What Really Happens?

The housing market is a mess right now. Millions of Americans are unable to make their mortgage payments. When a mortgage goes unpaid for too long, then a foreclosure follows. This hurts the housing market more because every foreclosure drags the cost of homes down lower and costs lenders even more money. To answer this problem homeowners can now seek and receive a loan modification. But what happens with a loan modification?

First of all, the entire point of a loan modification is to lower a monthly mortgage payment so that it's more affordable. This is done by one or more of the mortgage terms being changed. The loan modification has to be agreed upon by both the lender and the mortgagee. However, there are certain criteria that must be met in order for a mortgagee to qualify for a loan modification.

Three of the biggest conditions that must be met are:

1. The homeowner has to demonstrate a hardship that resulted in an inability to pay the monthly mortgage payment. There are many different types of hardships that qualify.

2.The mortgagee has to prove that the new monthly payment obligation set forth by the loan modification is affordable and can be made on time.

3.The current home has to be worth less than the current amount of the mortgage. With the crash in the value of homes, this is the case for millions of Americans.

Unfortunately, once a homeowner falls behind with a couple mortgage payments, the late fees and penalties make it almost impossible to ever get caught up with the payments. What often happens with a loan modification is that those late fees and penalties can actually be rolled right into the principal of the loan.

So, what happens with a loan modification is that the mortgagee and the mortgagor agree to change one or more of the terms of a mortgage. Then the mortgagee basically starts all over with a new lower monthly payment that is much more affordable. This keeps the mortgagee in the home and it allows the lender to continue getting paid on the loan.

That's what happens with a loan modification. It's a great alternative for many homeowners, and many lenders, since it allows homeowners to stay in their home and won't continue to add more weight to a housing market that is already near its breaking point.