- The best mortgage modification avoids default altogether. This means that the mortgage has not yet become so late in payments that the lender changes its status to a default, or a failed loan, a key part in the foreclosure process. A default severely damages credit ratings and creates many fees that borrowers must pay to redeem the loan. Borrowers should seek a modification before the default occurs. Many lenders will be willing to pause loan payments, not requiring payments for several months in order to give borrowers a chance to recover financially.
- Other modifications allow borrowers to lower the rate on the mortgage. This is always an ideal solution, because a lower rate is a permanent change. It will create lower monthly payments for the rest of the mortgage, extending the benefit for years to come. Unfortunately, lenders rarely modify the loan so drastically unless it has already been defaulted, or unless there is proof that the borrower is in severe financial hardship.
- Sometimes borrowers are also able to change their mortgage into a different payment structure. For instance, a borrower may be able to modify a variable rate loan into a fixed rate loan. This ensures that the monthly payments will not rise in the future, and makes it much easier for borrowers to plan their finances correctly. Lenders may also agree to a change in the structure more easily than other, more drastic types of mortgage modification.
- This is more difficult to work toward, but borrowers should also try to aim for a low tax burden. Unless the mortgage was taken out in 2007 or 2008 and falls under a government exemption, homeowners will have to pay taxes on the money that the lender forgives as part of the mortgage modification process. It may be better for the lender to combine late payments back into the loan amount rather than forgive payments. This creates little extra cost in the short term and saves the borrower from the incurred taxes.
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