If you're struggling to make your mortgage payments, you don’t always have to default. You can adjust and get back on track without wrecking your credit. A mortgage modification program can provide relief by making permanent or temporary changes to your loan. Learning what a loan modification involves and how to get one can help you stay on top of your loan payments and keep your home.
- A loan modification changes the terms of your mortgage to help you get caught up on payments.
- Lenders prefer loan modifications to costly foreclosures and short sales.
- A loan modification may reduce your principal, lower your interest rate, extend your term, and even postpone your payments.
- To get a loan modification, contact your lender and complete a loss mitigation application.
Basics of Mortgage Modification
A loan modification is a change the lender makes to the terms of your mortgage, often due to financial hardship. The goal is to reduce your monthly payment to an amount that you can afford. You can achieve this in a few ways. Your lender will calculate a new monthly payment based on amendments that it makes to your mortgage contract.
Why Lenders Permit Mortgage Modification
Adjusting a loan tends to be less expensive and time-consuming for lenders. It also takes less of a financial and emotional toll on homeowners when compared to the other ways lenders can recoup money from a borrower who cannot repay their loan.
Without a loan modification, your lender has several options. Once you stop making mortgage payments, they can:
- Foreclose on your property: A mortgage modification is a nicer alternative to foreclosure. This occurs when a bank takes back a home, evicts the homeowner, and sells the home of the 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 must get a court order to have a portion of your paycheck withheld to pay off your 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.
Those options are likely to result in the loss of your home or damage to your credit. In contrast, a loan modification enables a homeowner to stay in their home. It could also mean less of a hit to the credit score than foreclosure would cause. Some government mortgage modification programs have no impact on credit.
Mortgage Modification Options
Your lender might not offer all these options. Some types of loan adjustments may be better suited to you than others. Common alternatives include:
- Principal reduction: Your lender will wipe out a portion of your debt, letting you repay less than you first borrowed. Monthly payments will adjust based on the decreased balance, so they should be smaller. This type of mortgage modification can be the hardest to qualify for, and lenders are often 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 lucky enough to get approved for a principal reduction, discuss the matter 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, 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 sometimes 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 originally would.
- Fixed-rate loan: If your adjustable-rate mortgage is proving to be unaffordable, you can switch to a fixed-rate loan where the interest rate is fixed over the loan term.
- Postponed payments: You might be able to pause loan payments if you're between jobs but know you have a paycheck coming in the future. This is also a good option if you have surprise medical expenses that you know you will pay off. This type of modification is often referred to as a "forbearance agreement." You must make up those missed payments at some point. 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 just how your payment changes if you adjust the principal, interest rate, or term.
Depending on the type of loan you have, you may be able to qualify for a government mortgage modification program, with no harm to 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. 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. Those are now all expired, They were replaced by Fannie Mae's Flex Modification and the High Loan-to-Value Refinance Option,. Start there for help.
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 often require a loss mitigation application and details about your finances to weigh your request. Some will require that you miss a mortgage payment, often by up to 60 days. Be ready to provide:
- Income: This is how much you earn and where it comes from.
- Expenses: This is 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 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 use different criteria to approve 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 questions arise. It’s usually best to do what your bank tells you to do during this time, if at all possible. For instance, 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 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. You can also:
Refinance the Loan
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. You also need decent credit.
If you can't get a mortgage modification or refinance the loan, you might have one other option for keeping the property. You can file 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 in this if you qualify. This lets you catch up, get back on your feet, and even keep your home. You must typically keep making your current mortgage payments in the interim. If this seems impossible, look into whether you can consolidate your other debts into the payment plan as well. You must have enough income to qualify.
Mortgage Modification Scams
Alas, 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 for what you could easily do yourself. They sometimes charge a small fortune to do no 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. 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.