What Does It Mean When You Do a Modification of Your Mortgage?
A mortgage modification is an agreement between you and your mortgage lender to modify, or change, the repayment terms of your mortgage loan. A modification can include new terms such as a different repayment schedule, a reduction in principle, a reduction in interest or a combination of those things.
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Contract Modification
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A mortgage loan is a contract between you and the lender, and as such, it is always subject to further negotiation and modification. You and the mortgage lender are always free to enter into an agreement that modifies the original mortgage loan agreement. In essence, a modification is a new contract in which you and the lender agree to change the terms of your existing mortgage loan.
Types
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Mortgage modification agreements come in a variety of different types. In some instances, you may be able to negotiate for the lender to forgive some of the outstanding principal balance on your mortgage loan, or you may be able to convince the lender to reduce your interest rate to current market rates. Another common modification strategy is to simply reduce your monthly payments to an amount that you can currently afford, with any excess amount added to a large balloon payment at the end of your repayment schedule. Because modifications are negotiated agreements between you and your lender, the terms can vary as widely as the characteristics of the people who enter them.
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Procedure
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A mortgage modification only happens when you and your mortgage lender negotiate a new contract or agreement. Your mortgage lender will prepare a written contract for you to sign if you agree to the new terms and conditions. It is important to carefully review the written modification agreement because it can contain terms that vary significantly from your original loan agreement.
Optional
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Mortgage lenders are almost never legally required to enter into modification agreements. Several state and federal programs are available to provide financial incentives for mortgage lenders to enter into modification agreements, but no law actually requires mortgage lenders to do so. As a general rule, the lender will only enter into a modification agreement if they have good reason to believe that you will otherwise default on your mortgage loan repayment. The federal and state programs can help induce a lender to enter into a modification because they provide some type of financial incentive, although the amount of the incentive is generally not very high.
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References
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