What Is the Difference in Loan Modification & Loan Mitigation?
A loan modification is an agreement between a borrower and lender that alters the terms of a financial loan. The term is most commonly used in association with mortgage loans that are used by borrowers to finance the purchase of a house or other residence. Loan mitigation involves agreements to help borrowers who have defaulted on a loan, especially a mortgage, avoid losing their property.
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Loan Modification
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The federal government has partnered with mortgage issuers, primarily banks, to increase the number of loan modifications. In a loan modification, a borrower and lender agree to alter the terms of the mortgage. This often occurs is a mortgage has become too expensive and a borrower is unable to continue making payments. A modification is designed to allow the lender to continue receiving payments rather than having to accept a loss on a defaulted loan and take possession of the property.
Modification and Refinancing
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Refinancing agreements, according to the federal government's Making Home Affordable program, do not reduce the principal amount of a loan. Rather, refinancing is intended to help a borrower achieve a lower interest rate on the loan, reducing interest payments. Modifications may, but not always, reduce the amount of principal in a loan. This must be negotiated by the company servicing the mortgage and the borrower.
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Loan Mitigation
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Loan, or loss, mitigation is intended to assist borrowers who have defaulted on a loan or are in danger of doing so in the near future, a term known as imminent default. Loss mitigation is a broad term that, as the phrase suggests, is aimed at minimizing financial losses for both the borrower and the lender.
Loss Mitigation Options
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Lenders can rely on forbearance, where payments on a loan are suspended for a limited, specific time frame. Forbearance can occur after a specific event makes loan payments more difficult, such as a death, illness or loss of income. Loan modifications, as described above, are another accepted loss mitigation strategy.
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