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?
“In general, a mortgage loan modification is any change to the original terms of a loan,” says Joe Zeibert, senior director of Ally Home from Ally Bank in Charlotte, North Carolina.
A loan modification is different from refinancing. Refinancing entails replacing your loan with a new mortgage, whereas a loan modification changes the terms of your existing loan.
This could mean extending the length of your term, lowering your interest rate or changing from a variable interest rate to a fixed-rate loan. The terms of your modification are up to the lender and will depend on what’s best for the borrower, says Steve Hall, vice president of operations and analytics for Genworth, a private mortgage insurer, in Raleigh, North Carolina.
Zeibert says a modification ultimately results in lower monthly payments for the homeowner. “If you’re struggling to make ends meet or facing foreclosure, those savings can literally be life-changing,” he says.
Hall adds that “from a lender’s perspective it’s a positive outcome, too, because the foreclosure process is a very costly process, so it’s a win-win for both.”
Who qualifies for a loan modification
Not everyone struggling to make a mortgage payment can qualify for a loan modification. Hall says homeowners typically either must be delinquent for about 60 days, or they must be in imminent default, meaning they’re not delinquent yet, but there’s a high probability they will be.
Homeowners usually must also demonstrate they’ve incurred a hardship, Hall says. This could be the loss of a job, loss of a spouse, a disability or an illness that has affected your ability to repay your mortgage on your 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.
“Most servicing companies have programs designed to help borrowers who may be struggling to make their payments, driven by some of the hard lessons the industry learned during the housing collapse a few years back,” Zeibert says. He adds that Ally, in addition to modifications, offers some at-risk borrowers the ability to refinance to a lower rate at no cost, even if they haven’t endured a hardship.
If your lender or servicer doesn’t have a program of its own, ask if you are eligible for any of the 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. 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 new program.
The federal Home Affordable Refinance Program, or HARP, helped underwater homeowners refinance into a more affordable mortgage. This program is no longer available as of Dec. 31, 2018. Fannie Mae’s High Loan-to-Value Refinance Option and Freddie Mac’s Enhanced Relief Refinance replaced HARP.
How to get a loan modification
If you are struggling to make your mortgage payments, contact your lender or servicer immediately and ask about your options. 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.
It’s possible your lender will reach out to you about getting a loan modification. Hall’s team at Genworth uses predictive analytics to determine homeowners who are likely to default, and the loan servicers reach out to those borrowers to offer modified terms.
Hall says that Genworth has discovered that some delinquent homeowners avoid answering phone calls, fearing the worst. If you’re avoiding calls, consider answering — one of them may actually be your lender trying to put you into a modification that could help, he says.
If you’re denied a modification, you’ll have to file an appeal with your 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: “If the loan is being modified due to financial hardship, you may see a note about this added to your credit report, negatively impacting your credit score,” Zeibert says. The result won’t be nearly as negative as a foreclosure, he says, but could affect other loans you apply for in the future.
Another thing to be aware of, he adds, is 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 risks.
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