If you’re struggling to make your monthly mortgage payments or have fallen behind, you may be at risk of losing your home. But depending on the circumstances, you may be eligible for a loan modification, which can make it easier to stay on top of mortgage payments and avoid foreclosure.
If you’re in this position, here’s what to know about getting a mortgage loan modification.
What is a loan modification?
A loan modification is different from refinancing your mortgage. Refinancing entails replacing your loan with a new mortgage, whereas a loan modification changes the terms of your existing loan.
How does loan modification work?
Getting a mortgage loan modification could mean extending the length of your term, lowering your interest rate or changing from an adjustable-rate mortgage to a fixed-rate loan. Though the terms of your modification are up to the lender, the outcome is lower, more affordable monthly mortgage payments. Foreclosure is a costly process for lenders, so many are willing to consider loan modification as a way to avoid it.
“Foreclosure is a costly process for lenders, so many are willing to consider loan modification as a way to avoid it.”
Who qualifies for a loan modification?
Not everyone struggling to make a mortgage payment can qualify for a loan modification. In general, homeowners must either be delinquent or facing imminent default, meaning they're not delinquent yet, but there's a high probability they will be.
Reasons for imminent default include the loss of a job, loss of a spouse, a disability or an illness that has affected your ability to repay your mortgage on the original loan terms.
Types of loan modification programs
Some lenders and servicers offer their own loan modification programs, and the changes they make to your terms may be either temporary or permanent.
If your lender or servicer doesn’t have a program of its own, ask if you are eligible for any other assistance programs that can help you modify or even refinance your mortgage.
The federal government previously offered the Home Affordable Modification Program, but it expired at the end of 2016. Now, Fannie Mae and Freddie Mac have a foreclosure-prevention program, called the Flex Modification program, which went into effect Oct. 1, 2017. If your mortgage is owned or guaranteed by either Fannie or Freddie, you may be eligible for this program.
The federal Home Affordable Refinance Program, or HARP, helped underwater homeowners refinance into a more affordable mortgage. HARP has also expired. Fannie Mae's High Loan-to-Value Refinance Option and Freddie Mac's Enhanced Relief Refinance replaced HARP in 2019.
How to get a mortgage loan modification
If you are struggling to make your mortgage payments, contact your lender or servicer immediately and ask about your options. Avoiding phone calls or procrastinating will only make matters worse. The loan modification application process varies from lender to lender; some require proof of hardship, and others require a hardship letter explaining why you need the modification.
If you’re denied a loan modification, you can file an appeal with your mortgage servicer. Consider working with a HUD-approved housing counselor, who can assist you for free in challenging the decision and help you understand your options.
Know before you modify
One potential downside to a loan modification: It may be added to your credit report and could negatively impact your credit score. The resulting credit dip won’t be nearly as negative as a foreclosure but could affect your ability to qualify for other loans for a time.
If your modification is temporary, you'll likely need to return to the original terms of your mortgage and repay the amount that was deferred before you can qualify for a new purchase or refinance loan. After permanent modifications, lenders may want to see a record of 12 or even 24 on-time payments to determine your ability to repay a new loan.
Be aware that, depending on how your loan is modified, your mortgage term could be extended, meaning it will take longer to pay off your loan and will cost you more in interest.
But for homeowners on the brink of losing their homes, the benefits of a loan modification can far outweigh the potential credit risks and extra interest.