What is a Mortgage Modification, and How Do You Request One?

A mortgage modification is an agreement between you and your lender to avoid a foreclosure by making the terms of your loan more affordable. There are several different methods of modifying a mortgage, including reducing the interest rate, reducing the principal balance, and extending the amount of time left for repayment.

What is a Mortgage Modification?

Mortgage modification can take several forms. These often consist of lowering rates or extending loan terms. In some cases, a lender might roll the overdue amounts into the original balance in a process called reamortization. If you have an adjustable-rate home loan with an increasing rate, a modification might involve switching to a fixed-rate mortgage.

Mortgage Modification Options

  • Permanent or temporary interest rate reduction, lowering monthly costs
  • Loan term extension, providing more time to pay off the loan
  • Reamortization, adding overdue amounts to the unpaid principal balance
  • Change in mortgage loan type

A mortgage modification can save you from foreclosing on your home, but it comes at a cost. Depending on how the lender reports your modification to the credit bureaus, your credit score may be affected. Payments missed before being approved for a loan modification could still impact your credit score.

Your lender may also charge you fees associated with processing the mortgage modification. But since the whole point of modifying the loan is to provide immediate financial relief, you typically won't be expected to pay these fees right away. Instead, lenders often add these processing fees into your original loan for future repayment.

Finally, there's no guarantee that the lender will approve a loan modification. If the lender doesn't believe you can manage your loan payments even after modification, you might be encouraged to sell your home instead or even accept a foreclosure. If you’ve been granted one mortgage modification already, it's unlikely a lender will grant you another. If your mortgage has been modified and you're still struggling to make your payments, it might be time to consider an exit plan.

Benefits of a Mortgage Modification

Some of the benefits of opting for a mortgage modification include:

  • Avoiding foreclosure or a short sale
  • Reducing your monthly mortgage payments
  • Protecting your credit history from foreclosure or delinquent payments
  • Making your loan more affordable in the long-term

One of the main benefits of a loan modification is that it can help borrowers and lenders avoid a foreclosure or a short sale situation. From the a mortgage lender's perspective, cooperating with a struggling borrower is more cost-effective than finding a new customer. Modifying the terms of a mortgage may reduce the lender's long-term profit from interest payments, but it often costs lenders less than it would to manage and sell a foreclosed property.

Modification also makes monthly payments more affordable for people who experience financial hardship, fall behind on their mortgage payments, or fail to qualify for refinancing. Falling behind on just one mortgage payment can significantly harm your credit. According to FICO, missing a payment for one month can bring your score down about 40-100 points. Modifying your home loan can reduce your monthly payment, which will make it easier to catch up with your past due balance.

How to Request a Mortgage Modification

A mortgage modification isn't the only way to avoid foreclosure, but there are instances where other options don’t work. Here are solutions other than a loan modification that many buyers try before applying for a mortgage modification:

  • Raise funds to repay the overdue amount. You might need to find additional work, borrow money from family or sell major possessions, but repayment is always an option right up to foreclosure.
  • Refinance your loan. This is usually an option if you have healthy credit to qualify for competitive rates and you have some equity built up in your house. Many buyers turn to a mortgage modification if they do not qualify for a refinance.
  • Request a forbearance to postpone part or all of your payments. Forbearances usually give a borrower time to recover from illness or injury or find new work. Once a forbearance ends, you resume regular mortgage payments, along with an extra charge to cover your past-due amount.

When requesting a mortgage modification, you'll have to prove that you have an unavoidable financial hardship. This might involve a death in the family, job loss, illness, or disability. Hardship that's due to other personal debt such as credit cards or car payments don’t meet this requirement, since such expenses are considered to be within your control. Lenders will only modify a home loan for very serious, disruptive life events that affect your finances.

You’ll also have to show that you'll be able to make monthly payments after modification. A lender may consider what you have available to pay right now, and use that to adjust your monthly dues. This step requires submitting pay stubs or tax returns to verify your income information. You may also need to provide monthly statements for your mortgage and other recurring payments such as car loans, student loans, and credit cards.

With most lenders, you'll have to complete an application for the modification and explain your situation in a letter. The application will describe your debt-to-income ratio, your expenses and why you need the loan modification. Before you accept a loan modification, make sure you're well aware of what the changes will be, and how it'll affect your loan cost over time.

If you feel the need for additional preparation before reaching out to your lender, you can contact the Fannie Mae Mortgage Help Network for assistance. Fannie Mae can tell you whether or not you're likely to qualify for a modified mortgage.

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