Loan Modification: Lower Your Mortgage Payments and Avoid Foreclosure

Learn about what a loan modification can offer you

ballpoint pen and a calculator on a loan agreement.
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When you find yourself struggling to make your mortgage payments, you don’t necessarily have to default—you can make a few adjustments and get back on track without doing significant damage to your credit. A mortgage modification program can provide relief by making permanent or temporary changes to your loan. Understanding what a loan modification involves and how to get one can help you stay on top of your loan payments and potentially keep your home.

Basics of Mortgage Modification

A loan modification is a change that the lender makes to the original terms of your mortgage, typically due to financial hardship. The goal is to reduce your monthly payment to an amount that you can afford, which you can achieve in a variety of ways. Your lender will calculate a new monthly payment based on amendments that it makes to your initial mortgage contract.

Why Lenders Permit Mortgage Modification

Adjusting a loan tends to be less expensive and time-consuming for lenders and can take less of a financial and emotional toll on homeowners compared to other legal or financial remedies for recouping money from a borrower who cannot repay their loan.

Without a loan modification, your lender has several unattractive options to choose from to pay off your outstanding debt if and when you stop making mortgage payments. It can:

  • Foreclose on your property: A mortgage modification is a less palatable alternative to a foreclosure, which occurs when a bank repossesses a home, evicts the homeowner, and sells the home of a borrower who cannot repay their loan.
  • Facilitate a short sale: This refers to the sale of a home for less than what the homeowner owes on their mortgage. It still results in the homeowner losing their home.
  • Attempt to collect the money you owe through wage garnishment, bank levies, or collection agencies: With wage garnishment, a creditor generally has to get a court order to have a portion of your paycheck withheld to pay off your outstanding debt. 
  • Charge off the loan: In lieu of a foreclosure, a lender might decide to write the loan off as a loss if they determine that the debt is unlikely to be collected. 
  • Lose the ability to recover funds: If you declare bankruptcy, which can temporarily halt a foreclosure, the bank may not be able to recoup the funds.

The above options will likely either result in the loss of your home or damage to your credit. In contrast, what a loan modification enables a homeowner to do is stay in their home and potentially take less of a hit to their credit score than a foreclosure would cause—or even no impact to their credit in the case of some government mortgage modification programs.

Mortgage Modification Options

Your lender might not offer all of these options, and some types of loan adjustments may be more suitable for you than others. However, common alternatives include:

  • Principal reduction: Your lender will eliminate a portion of your debt, allowing you to repay less than you originally borrowed. It will recalculate your monthly payments based on this decreased balance, so they should be smaller. This type of mortgage modification is usually the most difficult to qualify for, and lenders are typically reluctant to reduce the principal on loans. They’re more eager to change other features which can result in more of a profit for them. If you’re fortunate enough to get approved for a principal reduction, discuss the implications with a tax advisor before moving forward; you might owe taxes on the forgiven debt.
  • Lower interest rate: Your lender can also reduce your interest rates, which will reduce your required monthly payments. Sometimes these rate reductions are temporary, however, so read the details carefully and prepare yourself for the day when your interest rate might increase again.
  • Extended-term: You'll have more years to repay your debt with a longer-term loan, and this, too, will result in lower monthly payments. This option is commonly referred to as "re-amortization." But longer repayment periods usually result in higher interest costs overall because you're paying interest across more months. You could end up paying more for your loan than you were originally going to pay.
  • Fixed-rate loan: If your adjustable-rate mortgage is proving to be unaffordable, you can prevent problems by switching to a fixed-rate loan where the interest rate is fixed over the loan term.
  • Postponed payments: You might be able to temporarily pause loan payments if you're between jobs but you know that you have a paycheck coming in the future, or if you have surprise medical expenses that you know you will pay off eventually. This type of modification is often referred to as a "forbearance agreement." You'll have to make up those missed payments at some point, however. Your lender will add them to the end of your loan, so it will take a few extra months to pay off the debt.

Punch the numbers into a loan amortization calculator to see exactly how your payment changes when you use any of these strategies.

Government Programs

Depending on the type of loan you have, you may be able to qualify for a government mortgage modification program, which may not negatively impact your credit score at all. Government programs, which include Federal Housing Administration (FHA) loans, U.S. Department of Veterans Affairs (VA) loans, and U.S. Department of Agriculture (USDA) loans, offer relief, and some federal and state agencies can also help. Speak with your loan servicer or a HUD-approved counselor for details. For other loans, try the Fannie Mae Mortgage Help Network.

The federal government previously offered the Home Affordable Modification Program (HAMP), the Home Affordable Refinance Program (HARP), and Freddie Mac's Enhanced Relief Refinance Program. However, those have all expired and have been replaced by Fannie Mae's Flex Modification and the High Loan-to-Value Refinance Option, so these are a good place to start for assistance.

How to Get a Mortgage Modification

Start with a phone call or online inquiry to the lender. Be honest and explain why it’s hard for you to make your mortgage payments right now. Then, let your lender know about your proposed adjustment to the mortgage.

Lenders will generally require a loss mitigation application and details about your finances to evaluate your request, and some will require that you also be delinquent with your mortgage payments, often by up to 60 days.  Be prepared to provide certain information:

  • Income: This is how much you earn and where it comes from.
  • Expenses: Be prepared to share how much you spend each month, and how much goes toward different categories, such as housing, food, and transportation.
  • Documents: You'll often need to provide proof of your financial situation, including pay stubs, bank statements, tax returns, and loan statements.
  • A hardship letter: Explain what happened that affects your ability to make your current mortgage payments, and how you hope to or have rectified the situation. Your other documentation should support this information.
  • IRS Form 4506-T: This form allows the lender to access your tax information from the Internal Revenue Service (IRS) if you can't or don't supply it yourself.

The application process can take several hours. You’ll have to fill out forms, gather information, and submit everything in the format your lender requires. Your application might be pushed aside—or worse, rejected—if something your lender asked for is missing or outdated.

Different lenders have different criteria for approving loan modification requests, so there's no way to know if you’ll qualify other than to ask. Within 30 days of receiving a completed application, the lender generally must respond to your application with written notice of its offer or denial along with the specific terms of the mortgage modification. Keep in contact with your lender during this time in case it has questions. It’s usually best to do what your bank tells you to do during this time, if at all possible. For example, you might be instructed to continue making payments. Doing so could help you qualify for the mortgage modification. In fact, this is a requirement for approval with some lenders.

Once you receive an offer for a loan modification, you'll have to accept or deny it within the prescribed timeframe to see the changes reflected in your loan.

Alternatives to a Mortgage Modification

Adjusting the terms of your loan isn't the only way to get on top of payments when you're struggling.

Refinance the Loan Instead

Modification is typically an option for borrowers who are unable to refinance, but it might be possible to replace your existing loan with a brand new one. This is a particularly good option if you want to get cash out from the equity that has built up in your home.

A new loan might have a lower interest rate and a longer repayment period, so the result would be the same—you’d have lower payments going forward. You'll probably have to pay application and origination fees on the new loan, however, and you'll also need decent credit.

Consider Bankruptcy

If you can't get a mortgage modification or refinance the loan, you might have one other option for keeping the property: filing for Chapter 13 bankruptcy. This isn't the same as a Chapter 7 bankruptcy where the court takes control of your non-exempt assets, if any, and liquidates them to pay your creditors. Chapter 13 allows you to enter into a court-approved payment plan to pay off your debts, usually for three to five years.

You can include your mortgage arrears if you qualify, allowing you to catch up, get back on your feet, and even keep your home, but you must typically continue to make your current mortgage payments during this time period. This might be possible, however, if you can consolidate your other debts into the payment plan as well. You must have sufficient income to qualify.

Mortgage Modification Scams

Unfortunately, homeowners in distress attract con artists. Beware of promises that sound too good to be true.

Some organizations will promise to help you get approved for a loan modification, but these services come at a steep price and you can easily do everything yourself. They typically charge you, sometimes exorbitantly, to do nothing more than collect documents from you and submit them to your lender on your behalf.

In some states, mortgage-relief companies are not legally permitted to charge a fee in advance to negotiate with your lender, and in other states, they're not allowed to negotiate for you regardless of when you pay them. Of course, don't count on fraudsters telling you this. It’s best to work directly with your lender to be on the safe side.

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