- Before a mortgage company modifies a loan, a homeowner's credit report shows only the loan, its balance and payment history. When the lender modifies the loan, it changes the terms of the mortgage by lowering the interest rate, loan amount or changing the loan's terms. The credit report then includes a note that the account was modified; this tells other lenders that the borrower was not able to pay the loan as initially agreed. This usually means the borrower paid the loan late at least once or twice. Some mortgage lenders may refuse to refinance a modified mortgage within 12 or 24 months of the modification. Many mortgage companies will refinance a non-modified mortgage of the same age.
- When a homeowner receives his initial loan, the lender does not restrict the mortgage payment to a fixed percentage of the borrower's income on most loans. The lender is concerned with the total amount of all debt payments in relationship to the the borrower's income. If the homeowner does not have any other debts and the loan program allows a debt-to-income (amount of debt in relation to the income) of 40 percent, the entire mortgage payment could be 40 percent of the borrower's gross monthly income. When a lender modifies a loan, it must lower the mortgage payment so it is not more than 31 percent of the borrower's gross monthly income. The modification does not take any of the other borrower's debt into consideration as long as the modified payment meets the 31 percent guideline.
- A non-modified mortgage may be any type of mortgage commonly available. The non-modified mortgage may be an adjustable rate mortgage, a hybrid adjustable rate mortgage or a balloon mortgage. The modified mortgage must be a fixed rate mortgage, usually for 30 years, to help the homeowner prevent future problems. Homeowners with unmodified mortgages have more options when choosing a mortgage program type than do homeowners with modified mortgages.
- Should the homeowner lose his job after his mortgage is modified, he would not qualify for the mortgage assistance programs specifically designed for unemployed homeowners. These programs provide assistance specifically for unemployed homeowners who have not already modified their mortgages. These programs may provide temporary payment suspension or partial forbearance. In addition, homeowners who live in states that qualify for this program can receive a zero interest and zero payment second mortgage, which they use to pay their first mortgages if they have not already modified them.
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