Can you get a loan modification on a jumbo mortgage? The answer is yes, but there are some significant differences from getting a mortgage modification on a conventional loan.

Some people may think they can't get a loan modification on a jumbo mortgage because they're not allowed under the government's Home Affordable Modification Program (HAMP), which is for conforming mortgages only.

More options than just HAMP

But while HAMP is probably the best-known loan modification program, it's not the only one out there. In fact, the great majority of borrowers who get mortgage loan modifications do so outside of HAMP, through private loan modifications arrangements negotiated with their lender.

Even if you have a jumbo mortgage, you're not necessarily excluded from HAMP if you live in a high-value area. What matters is whether you have a "conforming" mortgage, i.e., guaranteed by Fannie Mae or Freddie Mac, as most home loans are.

The standard limit on Fannie Mae and Freddie Mac mortgages is $417,000, although until recently it went as high as $729,750 in areas with higher real estate values. These higher value "conforming jumbos" are still eligible for HAMP, but only if your mortgage was conforming to begin with - if your mortgage was originally for $900,000 but you've now paid it down to $400,000, you don't qualify for HAMP, since your mortgage wasn't guaranteed by Fannie or Freddie to begin with.

Private loan modifications

A private, or proprietary, loan modification worked out with your lender is a real possibility, however. Foreclosures are very costly for lenders, so if you're in genuine financial distress and unable to keep up with your mortgage payments, it's often in their interest to work something out with you.

The best type of loan modification is one that lowers your monthly mortgage payments, making it easier for you to keep up. This is typically done by either lowering your interest rate or extending the term of your loan, or a combination of both. In some cases, the interest rate reduction is temporary, say for five years or so, allowing some time for your finances to recover before your payments go back up again.

Not all private loan modifications reduce your mortgage payments, however (although it is required under HAMP). Often, lenders will simply agree to restructure your mortgage to allow you to make up for a period of missed payments, in which case you may actually end up paying more each month.

In other cases, they may simply agree to tack the missed payments (along with any penalties and additional interest) onto the back end of the loan, so your payments don't increase and you don't have to make up any deficits until the mortgage is nearly paid off. In some cases, they may agree to waive penalties altogether, if that will help bring you back on a regular payment schedule.

Getting your lender to agree

One advantage that jumbo loan borrowers have when seeking a loan modification is that a foreclosure for them is going to be a lot more costly for the bank than a conventional mortgage would be - so your lender has an added motivation to work with you.

However, they're going to want to be sure you really can't afford your current payments - if they decide your debt load is manageable on your current income, or if you still have savings or investments you can tap, they'll likely be reluctant to grant you a modification at this time.

Some banks may be reluctant to grant a mortgage loan modification of any kind until the borrower is clearly in financial distress and starts missing payments. As a result, some financially pressed homeowners start to skip payments deliberately, to try to force the bank's hand. It's a risky strategy at best - basically a game of chicken - and one that will do serious damage to your credit that will take up to seven years to recover from.

Don't overlook refinancing

Getting a mortgage loan modification typically will do at least some damage to your credit, since you're not fully meeting the debt obligation. For that reason alone, it's always best to first try to refinance the mortgage if you need to reduce your monthly payments.

Refinancing, if you can do so, doesn't hurt your credit and, with interest rates as low as they are, can even provide better terms than a loan modification can. However, if you're going to refinance, you need to do so before you get into serious financial difficulty, or you won't be able to qualify.

Published on December 3, 2011