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In the past, if a person got behind on their mortgage payments, they had very few options. Either they could try to increase their income, get another loan at a higher rate, try to refinance, or they could sell the home. Without these approaches, unavoidable foreclosure loomed over them.

Today, there is a new option that makes all kinds of sense (and cents!). This is called Loan Modification. We're going to take some time to help you understand just what a loan modification is and how it can help you.

First, let's just make sure we understand what foreclosure is. When we borrow money from a bank, we are essentially agreeing to a contract wherein the bank buys the house for us and we pay the bank an agreed upon amount, with agreed upon interest, until the cost of the house is paid back. What this means, of course, is that the bank owns the house.

What this also means, less obviously, is that your house is not always an asset. If you have a large chunk of equity and you are able to easily make your house payments every month, the house is sort of an asset. However, if you are in a risky loan with difficult payments and a depreciating home, your house is a massive liability.

Truth is: your house is only an asset if it is paid off. Assets should make you money, but when you still owe money on your house, you are probably not making any money off of it.

So back to foreclosure. Foreclosure is when the lender decides the borrower is not going to be able to continue to faithfully pay on the loan, probably due to a history of non-payment, and the lender says the loan is in default and that they are going to repossess the home. Basically, the bank takes the home back, since they are the ones who really own it.

With an understanding of foreclosure, we can move on to loan modifications.

Loan Modifications: The What
A loan modification is exactly what it sounds like: a change to your loan agreement. This change can come in a variety of forms, which we will cover momentarily, but it is simply a change to your existing loan agreement.

A loan modification is not a refinance. It is not a home equity line of credit. It is not an unsecured loan.

When you get a loan modification, you stay in the same loan that you already have, but some of the terms of the agreement change. The point of a loan modification is to have a lower, more affordable payment on the loan that you already have with a lender. We will talk about why a lender would be willing to make these changes in the next section,

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