The stimulus package being advertised by the Obama administration is heavily influencing the mortgage industry in regulating loan modifications for distressed homeowners. Loan modifications are handled by service companies and do not require a new appraisal or closing costs.

Among the several reasons to apply for a loan modification, the main reason borrowers (homeowners) request for one is to generally avoid foreclosure. During the foreclosure process, the lender is not likely to grant a mortgage loan modification unless there is a realistic chance that the homeowner will be prepared to meet future responsibilities.

The regulation of loan modifications

Loan modifications in the short past have not been carefully structured by loan modification companies and loss mitigation departments. This resulted in many re-defaults by several homeowners and borrowers within a short period of time. Today the Obama administration has carefully regulated laws towards loan modifications and has dramatically reduced re-defaults.
What you get from a loan modification

• The balance on the mortgage loan can be adjusted if it is determined that the outstanding balance exceeds the existing value of the home
• Mortgage rates will most likely be converted to a fixed rate rather than a variable rate
• Interest rates may be lowered
• A combination of the above things mentioned can be done in order to reach a reasonable payment based on the financial situation and hardship of the borrower
• The loan term can be modified to a longer term to allow a longer repayment plan

During a loan modification, lenders or service companies are paid a fee to process a loan modification. The homeowner should expect to provide documentation of their finances and prove that they have the ability to maintain the new proposed mortgage payments.

There are several differences between a mortgage loan modification vs a mortgage home loan. These are used in different situations and are not synonymous with each other, although they both provide homeowners with financial relief. Refinance and Loan modification serve different sets of homeowners: Homeowners wanting monetary leverage and homeowners needing to save their home respectively.

Reasons for loan modifications and refinance

In the past year, mortgage loan modifications has become a large part of the real estate industry and often a term referenced with home foreclosures. So what is the big deal with mortgage loan modifications and how did it come about? In the 90’s and the most part of this decade, homeowners did not have to worry about loan modifications. Homeowners wanting better loan terms (equity take out or lender switch), often applied for a mortgage loan refinance.

Mortgage loan refinance is sensible in an increasing or stable market because it allowed homeowners the ability to fix or lower their interest rate or withdraw cash through equity, amongst other possibilities allowed from their lenders. Mortgage loan modification is relevant when mortgage property values drop significantly. This is due to the economy and the mortgage meltdown.

List of differences and similarities: Loan Modification vs Refinance

When working with a servicer or lender, the differences and similarities between a mortgage loan modification vs refinance are listed below.

Mortgage Loan Refinance:

• The borrower (homeowner) pays the closing cost
• Home appraisal report required
• Title policy and escrow required
• Offers a mortgage rate that is subject to current market conditions
• Credit score criteria must be met
• Homeowner must have a verified income statement
• Duration of a refinance can take 1 to 2 months to complete

Mortgage Loan Modification

• Home appraisal report is not required
• Title policy and escrow is not required
• Homeowner must have a verified income statement
• Homeowners credit score is not important for loan modification approval
• Duration of a refinance can take 1 to 4 months to complete
• Requires a financial hardship

Although a mortgage loan refinance offers homeowners several options (lower monthly payments, equity take out), a mortgage loan modification is intended for one purpose. That is allowing financially troubled homeowners in avoiding foreclosure and saving their credit.