Modifications have been in existence as long as the mortgage lending business has. However, the word was relatively uncommon. Thanks to the decline in the U.S. economy, the phrase “loan modification” has now become a household term. Today, lenders are examining their portfolios in an effort to help their struggling homeowners.

By definition, a loan modification is simply a change or adjustment to the original mortgage agreement that was secured during the purchase or refinance of an individual’s property.  The last time you closed on your home you were required to sign a document called the Note. The promissory Note details the terms of how the loan is to be paid back.

It shows information which includes, monthly payments, term and final payment date.  When this note is changed the result is called a modification.  Common changes made to Note might include lowering the interest rate, a principle reduction of the balance or a change in the terms of the loan.  In many cases it is a combination of each.

Primarily, loan modifications happen as a result of negotiations with your lender.  Many people believe that professional modification companies are responsible for the end results, this is not accurate.  Professional services mealy act on your behalf.  They typically will charge $1,500-$3,000 for their services, with no guarantee of a specific outcome.   In reality, only your lender is authorized to change or modify your note.  Any result or outcome from a loan modification will ultimately come from your lender.  When completed, the results are usually dramatic.  A reduction in monthly payments of 35% or greater is very possible.

Well, if this explains how a loan modification works, then why would a bank even do one?  The benefits to the consumer are obvious.  You might be surprised to learn that the bank wins here too.  A restructured loan means a better performing asset and less risk for delinquency or foreclosure.  Think of it another way.  If you were a landlord and had a tenant who was struggling to make the rent payments, reducing the rent might be a way to keep a good tenant and avoid the hassle of an eviction process and finding a new renter.   Usually, the Banks belief will be ‘a partial payment is better than no payment at all’.  It is for this reason that loan modifications can actually have successful results.

Right now, mortgages rates are less than 5%.  If you have a rate that exceeds this amount, you could stand to benefit tremendously by renegotiating your loan.  It can be an easy decision for your bank as well because they are not taking any major concessions either.  They are only reducing your mortgage rate to current levels, therefore it’s not a loss for them.   As a result, your mortgage payments are less, the Bank’s default risk declines and it’s a win win situation for everybody.

Qualifying for a modification is completely different than qualifying for a refinance.  Don’t be reluctant to contact your lender because of your credit, job history or lack of home equity as these things are really not considered negative factors.

Once you have decided to move forward, the only other consideration is whether to hire a professional or do it yourself.  As stated earlier, because your bank will make the final decision, you can do it on your own.   With just a few hours of invested time, the same results as professional services can be attained.

An important note here, before you call your lender you need to have a general understanding about the loan modification process and how the bank will qualify you.  Understanding this is the key to increasing your chances of getting approved.

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J.Pisicchio is a 20 year veteran mortgage professional.  He has worked in all aspects of the lending business gaining experience from working at large corporations such at Chase.  Formally trained as credit analyst, he has spent his career educating borrowers so that they can make the best possible financial decisions.  For more information on loan modification visit http://www.mortgageloanmodificationsecrets.com

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