Mortgage loan modifications: everything you need to know


If you have trouble making your monthly mortgage payments or are late, you could lose your home. But depending on the circumstances, you may be eligible for a loan modification, which can make it easier for you to control your mortgage payments and avoid foreclosure.

If you are in this situation, here is what you need to know to get a mortgage modification.

What is a loan modification?

A loan modification is different from refinance your mortgage. Refinancing is replacing your loan with a new mortgage, while a loan modification changes the terms of your existing loan.

How does the loan modification work?

Getting a mortgage loan modification could mean extending your term, lowering your interest rate, or going from a variable rate mortgage to a fixed rate loan. While the terms of your modification will depend on the lender, the result is lower and more affordable monthly mortgage payments. Foreclosure is an expensive process for lenders, so many are willing to consider a loan modification as a way to avoid it.

Foreclosure is an expensive process for lenders, so many are willing to consider a loan modification as a way to avoid it.

Who is eligible for a loan modification?

Not everyone who is struggling to make a mortgage payment is eligible for a loan modification. Typically, homeowners must either be delinquent or face impending default, which means they are not delinquent yet, but there is a high probability that they are.

Reasons for impending default include loss of a job, loss of a spouse, disability or illness that affected your ability to pay off your mortgage under the original loan terms.

Types of loan modification programs

Some lenders and maintainers have their own loan modification programs, and the changes they make to your terms can be temporary or permanent.

If your lender or manager doesn’t have their own program, ask if you qualify for other 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. Now Fannie Mae and Freddie Mac have a foreclosure prevention program called the Flex modification program, which came into effect on October 1, 2017. If your mortgage is owned or guaranteed by Fannie or Freddie, you may be eligible for this program.

The Federal Affordable Home Refinance Program, or HARP, has helped underwater homeowners refinance themselves into a more affordable mortgage. HARP has also expired. Fannie Mae’s High Loan-to-Value Refinance Option and Freddie Mac’s Enhanced Relief Refinance replaced HARP in 2019.

How to get a mortgage loan modification

If you’re having trouble making your mortgage payments, immediately contact your lender or service agent and ask what your options are. Avoiding phone calls or procrastinating will only make matters worse. 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 change.

If you are refused a loan modification, you can lodge an appeal with your mortgage agent. Consider working with a HUD Certified Housing Advisor, who can help you challenge the decision for free and help you understand your options.

Know before modifying

One potential downside to a loan modification is that it can be added to your credit report and could negatively impact your credit score. The resulting drop in credit will not be as negative as a foreclosure, but could affect your ability to qualify for other loans for a period of time.

If your change is temporary, you will likely have to go back to your original mortgage terms and repay the amount that was carried over before you can qualify for a new purchase or loan refinance. After permanent changes, lenders may want to look at a record of 12 or even 24 on-time payments to determine your ability to repay a new loan.

Be aware that depending on how your loan is changed, your mortgage term may be extended, which means it will take longer to pay off your loan and cost you more in interest.

But for homeowners on the verge of losing their home, the benefits of a loan modification can far outweigh any potential credit risks and additional interest.

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