Loan Modifications - Definition and Tips for Homeowners

What is a Loan Modification?

Couple talking to loan officer
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Loan Modifications are changes to your loan agreement. Your payments get more affordable, and you don’t have to default on your loan. Banks choose to offer loan modification programs because it is easier and cheaper to work with you than to go after you.

Why do Banks Offer Loan Modification?

If you stop making payments, the bank has several options.

  • Attempt to collect (through wage garnishment or a bank levy), or hire somebody to do so
  • Give up hope and accept the loss
  • Watch you declare bankruptcy and receive little or nothing

None of these options are attractive to you or the bank. Your credit will suffer, and there’s a financial cost to the bank. Banks are not in the business of managing property, and you'd probably prefer not to move.

Is there another option? Yes - banks offer loan modification so that they don’t have to do any of the above. Loan modification can be less expensive and more profitable for banks, but not in every case.

How do I Get a Loan Modification?

To get a loan modification you generally have to ask. Call your lender and let them know about your financial situation. Just be honest and explain whether or not you’ll be able to make your payments. Ask what options are available to you. If they see things the same way you do, you may qualify for a loan modification.

Banks have different criteria for approving modification requests, so there is no way to know ahead of time if you’ll qualify - the only way to find out is to ask.

What Types of Loan Modifications Exist?

Banks can change the terms of your loan to make the payments more affordable. These changes may be permanent or temporary.

In any case, the result is a more manageable payment while you get back on your feet. For more details about the logistics, read up on the different loan modification options that your lender might offer.

With lower monthly payments, you could end up paying more in interest over the years. If loan modification keeps you afloat in the near term, it may be worth the cost. However, make sure you know what it'll cost you and that it's your best option - not just a way to free up cash each month.

Tips for Asking

To make the process smoother, be prepared when you request a mortgage modification. The bank will want evidence that you cannot make payments. Gather the following items:

  • Monthly income, and detail of where it comes from
  • Monthly expenses, broken down by category (mortgage, food, transportation, etc)
  • Paystubs
  • Bank statements
  • Loan statements and agreements

If you present a snapshot of your financial situation, the bank can make a decision on your mortgage modification more easily.

How Long Does it Take?

You should expect to spend several hours of your time requesting a mortgage modification. You’ll wait on hold when you call, you’ll have to present your case, and you’ll have to hunt down documents and forward them to the bank.

This is no small task.

After you request a mortgage modification, you should expect to wait several weeks before the bank actually does anything. During that time, do what the bank tells you - for example, they might say that you have to continue making payments to qualify for the mortgage modification.

Mortgage Modification Helpers

Plenty of businesses want to help you request a mortgage modification. The price you pay for their services is steep - often as much as a monthly mortgage payment. You don’t need anybody to help you request a mortgage modification (your bank makes a decision based on your financial situation, not who is asking).

Furthermore, you’ll have to provide the same information to the helper as you will to the bank. Just call your bank first and ask what you need to do for a mortgage modification.

If you want to pay somebody for their time and guidance, that’s fine - just be aware that you don’t have to.