We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What are the Different Types of Loan Modification Programs?

By Angela Johnson
Updated: May 17, 2024
Views: 6,899
Share

Loan modification programs allow individuals to revisit the terms of a loan. The most common types include forbearance, loan extension, interest rate reduction, partial claim, principal deferral, and repayment plans. Each of these programs assist borrowers and lenders in reaching new loan terms that will benefit both parties. Loan modification programs are generally considered preferable to defaulting on a loan.

A forbearance loan modification program allows a borrower who is experiencing a temporary financial hardship to remain current on the terms of a loan. Under this type of program, the lender will suspend or reduce loan payments for a temporary period of time. When the forbearance term ends, the lender will expect the borrower to repay the difference, either through installment payments or through one large lump sum payment.

A loan extension, also known as term extension, is a loan modification program that extends the term of a loan. For example, a homeowner may seek to amend a 30-year mortgage loan to instead be paid over a 40 year period. Though this program commonly reduces monthly payments, the additional interest from payments made over an increased period of time will likely result in a higher total payment.

An interest rate reduction is one of the most common types of loan modification programs. Also known as reduced rate modification, it typically allows a borrower to reduce the monthly payments associated with a loan. Interest rate reductions can be a short-term or long-term solution. The amount the lender loses in unpaid interest as a result of this modification will generally be added to the principal amount.

Partial claim loan modification programs are for borrowers who are at least four months behind on their mortgage payments, and are able to prove that a financial hardship exists. In the US, these programs are often seen on Federal Housing Administration (FHA) loans. In order to resolve the issue without defaulting, missed payments are rolled into an additional loan that is added as a second mortgage. Payment of the second mortgage is usually collected when the loan is refinanced or the property is sold.

Another common loan modification program is loan principal deferral. This type of modification lowers the monthly payment by deferring part of the principal. The deferred amount will be due when the loan matures, when the loan is refinanced, or when the property sells.

Repayment plans may be arranged for borrowers who are delinquent on their loans. These plans allow the borrower to repay a loan through installments, rather than paying one lump sum. A down payment, or percentage of the total amount, is generally required at the beginning of this process.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

Editors' Picks

Discussion Comments
Share
https://www.wisegeek.net/what-are-the-different-types-of-loan-modification-programs.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.