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A loan modification is a long-term mortgage relief option for borrowers experiencing financial hardship, such as loss of income due to illness.
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A modification typically changes the rate, term, or both of the loan to make monthly payments more affordable.
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If you want to modify your mortgage, you must provide proof of hardship to your lender or mortgage servicer.
A mortgage loan modification is a relief option designed for borrowers who are experiencing long-term financial difficulties that make it impossible for them to keep up with payments. The goal is to reduce your monthly payments to an affordable level, helping you stay current on the loan and your home.
The modification permanently changes your existing mortgage. If your lender approves, it may reduce your interest rate, change the structure of your overall loan, or both.
Lenders allow loan modification agreements because the alternative (default and foreclosure) is more costly to their businesses. In other words, they don’t want the house, but they do want the loan paid off, and a modification helps them achieve both goals.
You can’t just modify your loan because you want to save some money. A mortgage loan modification is a solution for borrowers facing significant financial hardship.
To qualify for a mortgage modification, you will typically need to meet these three minimum requirements:
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Provide proof of significant financial difficulties that impede your ability to repay the loan as it currently exists. Examples may include a long-term illness or disability, the death of an income-providing family member, a sudden increase in housing costs (such as property taxes), divorce, or a natural disaster.
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Be at least a month late on your loan payment or on the verge of missing a payment.
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Live in the house as your primary residence.
Before approving your loan modification, many servicers will require you to successfully complete a trial period plan. During this period, which typically lasts three or four months, you will make payments of the proposed modified amount. If you do them all on time, the modification will likely be completed.
There are several ways to make your mortgage more affordable, and your options may differ depending on the type of loan you have.
Generally, your lender or servicer may implement one or more of these modification options:
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Reduce the interest rate: With a lower rate, you’ll have lower monthly mortgage payments and save interest in the long run.
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Extend the repayment period: Lengthening the term of the loan also reduces monthly mortgage payments.
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Reduce capital: In some cases, the lender may forgive part of the loan balance to reduce your monthly payments. However, keep in mind that the IRS treats forgiven debt as income, so you’ll need to report it on your tax return.
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Convert an adjustable rate to a fixed rate: The interest rate on an adjustable rate mortgage fluctuates. If it increases, your monthly payments may no longer fit your budget. Switching to a fixed-rate mortgage gives you more financial stability.
Keep in mind that some modifications may save you money in the short term, but not necessarily in the long term. “If the modification means extending the term of the loan, which is often the case, you will pay more interest,” says Seth Bellas, production branch manager for Canopy Mortgage in Michigan. “A common modification is to push the loan amortization from 30 to 40 years, which would mean that you are paying the principal at a slower rate and therefore paying more interest.”
However, if the modification helps you stay in your home, you may not care about that trade-off.
There are different modification programs for different types of loans:
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Conventional loans: If you have a conventional mortgage backed by Fannie Mae or Freddie Mac, you may be eligible for the Flex Modification program, which can reduce your monthly payments by up to 20%, extend the loan term up to 40 years, and potentially lower your interest rate.
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FHA Loans: FHA loan modification options include an interest-free loan of up to 30% of your balance or a 40-year loan extension.
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VA Loans: If you have a VA loan, you may be able to roll over missed payments into the loan balance and work with your lender to come up with a new, more manageable payment schedule. You can also request a 40-year extension to your loan term.
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USDA Loans: With a USDA loan, you can modify your mortgage with an extended term of up to 40 years, reduce the interest rate and receive a “mortgage recovery advance,” a one-time payment to bring the loan current.
If you need a mortgage loan modification, follow these steps to request one from your servicer:
1. Review your circumstances: Before contacting your loan servicer, consider whether the difficulty requires a long-term or short-term solution. If you expect to be able to pay your current mortgage in the future, your servicer may be able to offer you another relief option.
2. Organize documentation that proves economic difficulties: In addition to providing your trustee with bank and other financial statements to show reduced income, prepare a letter explaining the circumstances of the hardship.
3. Contact your administrator: Contact your servicer’s loss mitigation department and request a loan modification. Keep careful records of the representatives you interact with and get everything in writing. If your application is denied, you may be able to request a second review if you applied at least three months before the foreclosure sale of your home.
4. Review the terms carefully: If your application is approved, compare the total payments on your original loan with the total payments on the mortgage modification. You’ll want to avoid a temporary reduction, and the reduced amount will be added back to your balance later. Additionally, avoid any interest-only modifications that adjust to a higher rate or add costs in the form of fines, fees or processing charges, says Rick Sharga of CJ Patrick Company, a California-based real estate consulting firm.
5. Keep track of your new payments. Make sure you understand the new monthly payment, when it is due, and the long-term implications for your finances.
A mortgage modification may not always be the best solution. If you are facing financial difficulties, also consider these alternative options:
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Patience: Mortgage forbearance is a short-term solution in which the lender agrees to suspend or reduce your monthly payments for up to one year. Interest will continue to accrue during this period. Once the forbearance ends, you will be placed on a payment plan.
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Refinance: You might consider refinancing if interest rates have dropped since you took out your loan. Refinancing can help you lower your monthly payment permanently, either by lowering your loan rate or extending your payment term. However, if you’re about to consider a modification, you probably won’t have the income to qualify or the savings to pay closing costs.
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short sale: Short sales involve selling your home when your mortgage balance is greater than the value of the home (often called “underwater”). Your lender will need to approve this type of sale and may have tax implications.
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Deed in Lieu of Foreclosure: This is a last resort option in which you relinquish the deed to your home in exchange for the lender releasing you from loan payments. This allows you to avoid the serious credit damage of a foreclosure, but it still means you will lose your home.
More information: What is the difference between a refinance and a modification?
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Does a loan modification affect my credit score?
Yes, a loan modification can affect your credit score unless your lender reports to the credit agencies that your mortgage is “paid as agreed.” Be sure to ask your servicer about this when looking for a loan modification so you know what to expect.
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Can you refinance after performing a loan modification?
Yes, it is possible to refinance after a loan modification, but you may need to meet certain requirements. “Guidelines vary for different types of loans,” says Matt Hackett, senior vice president and chief operating officer of Equity Now, a Dallas-based mortgage servicer. “In some cases, a lender may require 12 months of on-time payments after a modification before you can refinance. However, this varies and also depends on whether you were paying on time before the modification.”
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What are loan modification scams?
Unfortunately, there are mortgage loan modification scams designed to take your money with the false promise of avoiding foreclosure. “Scammers offer to act as a middleman between the homeowner and the lender,” Bellas says. “Some of the tactics they use include asking you to sign over your title to them or telling you to stop making payments to your current lender.” A scammer might also ask for money up front or encourage you to sign documents that are intentionally confusing. If you are asked to do any of these things, consider it a red flag.
