Loan modification also known as loan workout or loan restructuring is the process in which the existing terms and conditions of your mortgage is readjusted to enable you to become regular with payments. There are many ways in which the terms of your existing mortgage can be worked out. For instance if you have fallen behind on payments due to sudden financial hardship, you can request your lender for a loan workout.

Lender can help you out by adding up your missed payments at the end of your loan term. Another way the lender can help you out is by changing the rate of interest. For instance, you are currently making payments as per an adjustable-rate mortgage (ARM) which is 5.5%. The rate escalates to 8.5%. If the size of your mortgage is big, there will be a lot of difference in the monthly payments you make. So, you may start missing payments. The lender will help you by “fixing” the rate for a period of 2 or 3 years or by converting the existing interest rate to a fixed rate.

Rate reduction or payment reduction is another aspect of a loan modification program. If your current monthly income isn’t supporting your monthly mortgage payments, the lender may reduce the rate or payment so that you can make payments regularly.

Loan modification has been introduced to help homeowners with their payments. President Obama has introduced the mortgage bailout program to save at least 7 million to 9 million homeowners. However, the mortgage bailout program helped homeowners that qualified for the program. Obama’s program didn’t help borrowers who had second mortgages. As such, Obama had to introduce another program that is an extension of the Foreclosure prevention plan. It addresses the needs of borrowers with second mortgages also.

It may be recalled that owing to subprime lending, lenders have become very cautious in extending credit to individuals. There are many consumers that don’t qualify for the program because they don’t have enough equity in their homes. Even if lenders are approving loan, they are doing so at very high interest rates.