What is the difference between restitution and modification of a home loan or mortgage?

If your mortgage lender has sent you a letter demanding that you pay all of your late payments, as well as all late fees, penalties, and legal fees to stay current, then the process they are working through is called reinstating your loan. . Your lender believes that the delinquent amounts do not meet the terms of your mortgage loan. This requires them to demand you catch up or they must foreclose on your mortgage and keep your house. Can a home loan modification bypass this process and get you up to speed without having to pay this large amount? If the answer is yes, why is this true? You may ask, what is the difference between reinstating and modifying a home loan?

The payment demand letter a borrower receives is based on the terms of the loan. It only allows you to pay the payment as described in your loan documents. If you are behind on your payments, you will still be bound by the terms of your contract with the lender. There is no language in your loan to allow changes. Therefore, the lender has no choice but to collect or foreclose on the mortgage. You are in arrears and the only contractual way to stay current is to pay all amounts due. Then his loan has been “reinstated” and he can keep his house as long as he continues to make the payments on time. This process is called reinstatement.

But, the problem with the reinstatement process is that if you’re too far behind, you won’t be able to find enough cash to catch up all at once. The language of your loan triggers a foreclosure that you cannot stop.

Unless… You can work out an agreement with your lender to “change” the language and terms of your loan. This type of situation will require you to “modify” your loan. You modify the terms so that you can continue to own and pay for your home. It would include interest reduction to lower your monthly payment and take your missed payments and put them back on your loan. The new terms would have the effect of creating new monthly payments, which would be affordable to you. Your monthly payments would now fit within your monthly budget.

Why would the lender do this? Because your lender loses a lot of money every time he forecloses on a house. This is complicated, but the costs your lender must pay may include:

1. The cost of the foreclosure process that goes through the court system.

2. Your house will probably sell for less today than it did a few years ago because of the economy. If your lender receives less than what you are owed, then you lose this money.

3. Take care of your home while it is in the sale process. This includes large real estate commissions, utility bills, and maintenance.

4. The lender borrowed money from an even larger lender to lend him the money he used to buy his house. Your lender must return it.

5. While your home is in foreclosure or for sale, your lender cannot use it as an asset on the bank’s balance sheet. They are then criticized by government regulators.

Well, what does your lender want? First, the lender wants you to catch up on your payments on your own and get restitution. If that’s not possible and you can identify the problems you’ve had that caused you to fall behind, then the lender wants to work with you. The lender wants you to show what went wrong; what is different today; and how much you can afford. Then they must see if they can make their plan work from their point of view.

If you can agree on terms that work for both of you, then you can change the wording or terms of your loan to incorporate the new agreement. You will not get a new loan or a refinance loan. You will do a “home loan modification,” which simply changes some of the terms of the loan, so that it now includes your new agreements.

Home loan modifications are being done thousands of times a day, due to the current housing crisis. You can do it yourself, if you are familiar with the process. However, this can be tricky. I would interview various experts in home loan modification processes. Find out what they promise, what they charge, and if they accept payments. For my recommendation, see my resource box below.