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- A loan modification is an agreement between a borrower and a lender to permanently change the terms of a mortgage.
- You'll need to prove financial hardship in order to qualify for a loan modification.
- Loan modifications can help you keep your home, but may lead to a longer repayment period.
If a job loss, natural disaster, illness, or other unexpected circumstance means falling behind on your mortgage, a loan modification could be a solution.
By changing the terms of your loan, such as the interest rate or repayment length, a loan modification can bring your monthly mortgage payment down and provide relief — especially if you're behind and facing severe consequences, like foreclosure.
However, there are some potential negative consequences of a loan modification that you should keep in mind.
Changing your loan terms to make payments more affordable
A loan modification permanently changes the terms of your home loan to make payments easier to manage. You'll need to prove significant financial hardship to qualify for a loan modification, usually through documentation such as a termination letter from an employer or copies of medical bills.
Generally, borrowers can't get a loan modification unless they're at risk of foreclosure. If you've missed enough payments to lead your lender to consider foreclosure, a loan modification may be the only way out.
Loan modifications are most common if a borrower was temporarily unable to pay their mortgage and they expect circumstances are improving, says real-estate attorney David Reischer, as it's less of a hassle for lenders (and often cheaper) than pursuing foreclosure.
Lenders and banks aren't obligated to accept a loan modification, though.
"Lenders will generally deny a loan modification if a borrower is unemployed and the likelihood of the loan going back into default is high," Reischer says.
Reasons for loan modification
There are many reasons you might want to pursue a loan modification. You may have lost your job or had your hours cut, putting your mortgage payments now out of reach.
Facing sudden expenses — like medical bills due to an unexpected illness — or being unable to work due to an injury or disability could also be good reasons for modifying your loan as well.
Potential modification options
Common types of mortgage loan modifications include lengthening the loan term, lowering the interest rate, or switching from an adjustable to a fixed-rate mortgage.
Here are the common types of mortgage loan modifications:
- Conventional loans: Modifications may include a Freddie Mac or Fannie Mae Flex modification, which may be an extension of the loan term, reduction of monthly payment amounts, reduction in interest rate, partial forbearance on principal, or change from an adjustable to a fixed-rate mortgage.
- FHA loans: Potential FHA modifications include adding missed payments to the original principal and extending the term to 30 years at a fixed interest rate. Another option is a "partial claim," which is an interest-free subordinate lien on the property, to be paid at the end of the loan term or when sold or refinanced. Modifications and partial claims may be combined. HUD also announced a new 40-year mortgage modification for certain borrowers as part of its COVID-19 recovery assistance.
- VA loans: VA loan modifications may allow the borrower to add missed payments and any related legal costs to the mortgage balance, then agree with the lender on a new payment schedule.
Your lender or loan servicer can clarify what loan modification options you have available.
How to get a mortgage loan modification
Loan modifications aren't automatic. They're approved on a case-by-case basis, and you'll need to work with your lender directly to pursue one.
Here's what the mortgage loan modification process generally looks like:
1. Contact your lender or servicer
To start, you'll need to contact your lender or loan servicer and ask about what loan modification options they offer. Not all lenders offer these.
If yours does, ask to start the process. They'll ask you about your financial situation and why you need a loan modification. You should also be prepared to fill out a loss mitigation application. .
2. Gather your financial documentation
Next, gather any related financial documents. This might include bank statements, pay stubs, or a letter of termination, if you've been laid off. You may also want to submit bills for unexpected medical costs or other expenses that are causing financial strain. You'll need to prove to your lender that you are, indeed, dealing with a financial hardship that's making it impossible to make your payments.
3. Submit a hardship letter
Last, you'll need to write and submit a letter explaining your financial hardship to your lender. This serves as official documentation of the hardship and, along with your financial paperwork, will be used to evaluate your financial circumstances and approve (or deny) your loan modification request.
FAQs
Exact eligibility criteria will depend on your lender, but you'll usually need to demonstrate a financial hardship and have a history of on-time mortgage payments (before the hardship) to qualify. If you're wondering how to qualify for a mortgage loan modification on your mortgage, talk to your lender.
Missed payments can certainly impact your credit score, but a successful loan modification can help you avoid those — and future credit hits — in the future.
There are several alternatives to loan modifications that you might want to explore, including forbearance, refinancing, or a short sale. A deed in lieu of foreclosure may also be an option.
You can initiate a loan modification with your lender or servicer yourself. However, these are complex processes, so seeking guidance from a HUD-approved housing counselor or attorney might be wise.
If your request for loan modification is denied, you can explore other foreclosure prevention measures, like forbearance, a short sale, or a deed in lieu of foreclosure.
Some companies market mortgage relief services, like loan modifications. Unfortunately, many of these are scams. The key to avoiding mortgage loan modification scams is to watch for any upfront fees. If a company asks you to sign over the title or stop making mortgage payments altogether, it's also a red flag.
There's no official statistic, but you're more likely to be successful if you have documentation to prove your financial hardship. Having a history of on-time mortgage payments can also help your case.
Editorial Note: Any opinions, analyses, reviews, or recommendations expressed in this article are the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any card issuer. Read our editorial standards.
Please note: While the offers mentioned above are accurate at the time of publication, they're subject to change at any time and may have changed, or may no longer be available.
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