A mortgage loan modification is an arrangement that reduces a borrower's mortgage obligations during a time of financial difficulty. It's intended to make it easier for the borrower to keep up with their loan payments and avoid losing their home to foreclosure.
Approval can be difficult to obtain. It's up to the mortgage company to decide whether to grant a home loan modification or not. However, a mortgage modification can be in a lender's best interest. If the result is that borrower is able to keep up with their payments, the mortgage company is able to avoid the expense of foreclosure and keep a performing loan on its books.
How does loan modification work?
A mortgage loan modification is exactly what the name implies – the terms of your mortgage are modified, or changed, to make the loan more affordable. Perhaps the mortgage rate is reduced. Past-due amounts may be paid off in installments, or deferred until the end of the loan. The loan term may be extended, reducing the amount of principle that must be paid every month. In some cases the lender may even write off some of the loan principle, reducing the total amount owed on the loan.
Loan modifications are often temporary. Your mortgage rate may be reduced for several years, but eventually reverts back to what you were originally paying. Or the lender may allow you a period of time in which to make up late payments without further penalties.
Others are long-term changes, such as extending your loan term or writing off mortgage principle. These are usually more difficult to obtain than temporary modifications, though.
A loan modification is granted by your mortgage servicer, the company to which you send your mortgage payments. This may be a different company than the one you originally obtained your mortgage from. However, they are the ones you would contact to inquire about a home loan modification.
What's the difference between a loan modification and refinancing?
Refinancing your existing home loan is another way to obtain a more affordable mortgage payment. However, refinancing requires that you have good credit and solid finances – which most candidates for a loan modification do not have.
Refinancing a mortgage means replacing your current mortgage with a new one that has more favorable terms. That means you need to qualify for the new mortgage, just as you did with the original one. But if you're already missing mortgage payments due to tight finances, it's going to be hard to qualify for a conventional refinance.
A loan modification is simply modifying the terms of your existing mortgage to make it more affordable or help you catch up on delinquent payments. It may be temporary or permanent. It's also expressly designed for people in financial difficulty.
Where do I get a loan modification?
The first step in getting a mortgage loan modification is to contact your mortgage servicer, the company you send your monthly payments to. That may be your original lender, but in many cases it's another company that has bought the servicing rights to your loan. In any event, the contact information will be included with your mortgage statement.
Loan modification programs and processes vary among individual lenders and mortgage servicers. Some may be more willing to approve a mortgage loan modification than others or may offer more generous terms.
You may have heard of the HAMP (Home Affordable Modification Program) loan modification, which is backed by the federal government. HAMP loan modifications have their own standards and guidelines, but you still need to go through your mortgage servicer to begin the process and your servicer has the final word on whether you will be approved or not. Not all servicers participate in HAMP.
Other programs offering mortgage relief for homeowners in financial difficulty are offered by Fannie Mae, Freddie Mac, the FHA, the VA and USDA for borrowers with those types of loans. Again, your first step in applying for these would be to inquire with your mortgage servicer. See below for more information on individual loan modification programs.
How to qualify for a loan modification
This will vary depending on your mortgage servicer, the company to which you send your mortgage payments. However, many have similar criteria. These are the most common loan modification requirements:
- Experienced a documented hardship or change in financial circumstances
- Own and occupies the property as a primary residence
- Not filed bankruptcy
- Do not purposely default to get a loan modification
- Make sure you are responsive in working with your lender
It helps if you can show your financial crisis is only a temporary one, such as a medical crisis or losing a job through no fault of your own. Mortgage servicers are more willing to grant a loan modification if there's a reasonable expectation you'll be able to return to a normal payment schedule down the road. It's more difficult to obtain long-term relief for a permanent change in your financial situation.
Many lenders will not consider you for a mortgage loan modification until you have missed at least three payments (90 days delinquent). However, it's still a good idea to contact your mortgage servicer as soon as you begin missing payments, just to get the ball rolling.
Since many of the programs do vary in how they work, you should contact your mortgage servicer for specific information about the options that may be available to you.
What documents will I need?
Your loan modification package is going to be the most important part of your mortgage modification efforts. Again, the contents and process for packaging the information for your lender's consideration will vary, but the critical elements are typically the same. Here is an example of the documents you will probably require:
- A letter documenting and explaining your hardship
- Proof of current income and capability to make modified loan payment
- Detailed monthly expense report or budget
The principal purpose of the loan modification package is to provide your lender with sufficient documentation to evaluate the risk in modifying your mortgage. The main question your lender is trying to answer is can you pay the new modified mortgage payment, and will you.
Where can I get loan modification help?
A home loan modification can be difficult to obtain, and involve extensive discussions with your mortgage servicer. But it is something you should be able to do on your own. And there are resources available to help you.
The foremost of these is the federal Making Home Affordable Program, of which HAMP is a part. The MHA web site provides loan modification tips and a lot of other information on various loan modification options and guidance on how to go about seeking a mortgage loan modification.
If you'd like personal loan modification assistance, your first choice should be to speak with a counselor at a HUD-approved housing agency. These are nonprofit groups that have been vetted by the U.S. Department of Housing and Urban Development (HUD) and can advise you on how to go about seeking a mortgage modification. Use the above link to find one near you.
If you think you need paid, professional help, your best bet is to contact an attorney who specializes in real estate and foreclosure matters. Be wary of specialized loan-modification services, particularly those that "guarantee" results or require hefty payments up front. There are a lot of loan modification scams out there. No one can guarantee that you'll be able to secure a loan modification from your mortgage servicer and too often, borrowers who pay large fees for these services simply end up deeper in debt.
Is loan modification a good idea?
If you can't afford your mortgage bills, yes. If you're in tight financial straits, a mortgage modification may be the only way to avoid default and keep your home.
Done successfully, a loan modification can provide the breathing room you need to get through a financial crisis. Maybe you or your spouse has lost a job and you need to reduce expenses until a new one is found. Or you're coping with the bills from a medical crisis. Or maybe you're just not making as much as you did a few years ago and need long-term relief. A mortgage loan modification might be your best option.
There can be downsides to a loan modification. For example, extending the length of your loan to reduce your monthly payments means you'll pay a lot more in mortgage interest over the life of the loan, as well as spend a lot more time paying off your mortgage.
A mortgage loan modification can also damage your credit rating, as it counts as a situation where you did not make your originally promised mortgage payments in full. However, if you're in a situation where you need or can qualify for a loan modification it's likely that your credit has already taken a hit from missed loan payments, so this may not be a major concern.
A loan modification may not provide as much financial relief as you expect. For example, if you've missed several mortgage payments, the only modification your mortgage servicer may be willing to offer is to make up those payments over several months – in addition to your current mortgage payments. Which may not be much help if you're already having trouble covering your regular payments as it is.
Before accepting a loan modification, you want to make sure it will provide meaningful relief and give you a reasonable chance at getting your finances in order. If not, you may want to consider whether to cut your losses and sell the home before it goes into foreclosure, or else continue negotiating with your lender to try and obtain better terms.
What are my rights with a loan modification?
In the early days of HAMP, right after the housing market crashed, there were a lot of complaints from homeowners who felt they were getting the runaround from their mortgage companies when seeking a loan modification. They complained of repeated requests for the same documentation, getting shuffled around among different departments and personnel, and of being foreclosed upon even while their application for a modification was still in the works.
Much of that has now changed. New rules put in place by the Consumer Financial Protection Bureau require that servicers must notify at-risk borrowers of foreclosure alternatives and cannot pursue a foreclosure while an application for a mortgage loan modification is pending. They also must consider all alternatives to foreclosure and give a borrower adequate time to respond before a foreclosure can take place. They also must ensure that borrowers have ready access to the personnel with the ability to help them.
Additional mortgage relief and protections are provided under the National Mortgage Settlement of 2012. That settlement provides benefits to borrowers whose mortgages are owned or serviced by five of the nation's largest mortgage companies: Ally/GMAC/Residential Capital LLC (ResCap), Bank of America, Citi, JP Morgan Chase and Wells Fargo.
Among other provisions, the settlement obliges those lenders to take a more proactive approach toward loan modifications for at-risk homeowners, including principle reductions. The settlement also limits the fees that can be charged to borrowers for loan modifications and requires improved communications and staff servicing for borrowers seeking loan modifications.
The settlement resolves charges of improper foreclosure procedures and deceptive loan modification practices following the crash of the housing market and onset of the Great Recession, pursued by state attorneys general against the five lenders.
Loan modification programs
There are a variety of loan modification programs out there. The ones you might be eligible for is determined by whether your mortgage servicer participates in them and the entity that owns or guarantees your mortgage. Remember, all loan modifications are subject to the lender or mortgage servicer's discretion.
Here are some of the major ones.
Home Affordable Modification Program/HAMP
This is the best-known and largest loan modification program, established by the Obama administration through the U.S. Treasury and HUD. Loan modifications under this program seek to reduce a borrower's mortgage payments to an affordable level, defined as 31 percent of gross monthly income, which is lower than borrowers often receive through lenders' own modification programs.
Mortgage payments may be reduced using mortgage rate reductions, extending the loan term to 40 years and deferring payment on a portion of the loan principle interest-free until the rest of the loan is paid off. Borrowers whose loan balance exceeds 115 percent of their current home value may be eligible for a principle reduction as well.
HAMP also has a Tier II modification for borrowers who failed to complete a previous HAMP modification, seek a rental property mortgage modification and other situations.
HAMP is currently due to expire at the end of 2016, though the program has been extended in the past.
You can learn more about this program at: Making Home Affordable.
FHFA Principle Reduction Program
This is a modification of the FHFA's previously offered Streamlined Modification and is designed for borrowers with Fannie Mae or Freddie Mac mortgages who are 1) underwater on their loans 2) at least 90 days delinquent on their payments and 3) owe less than $250,000 on their mortgages.
The loan modification involves a principle reduction to lower the borrower's outstanding mortgage debt to 115 percent of the home's current market value or reduce the outstanding principle by 30 percent, whichever is less. The mortgage rate is reduced to current market rates and the loan term extended to 40 years to minimize payments.
Borrowers may not apply for this program; mortgage servicers will identify eligible borrowers and contact them directly by July 15, 2016. It is not clear if the program will be extended in any form beyond 2016.
FHA loan modification
The FHA has its own version of HAMP that permanently reduces a borrower's mortgage payments through what is called a partial claim. Up to 30 percent of the outstanding loan balance is split off into an interest-free subordinate mortgage that requires no payments until the existing mortgage is paid off. Payments on the existing mortgage are reduced to a more affordable level and mortgage delinquencies are restored to current status. FHA modification guidelines in terms of eligibility are the same as for the regular HAMP, though limited to existing FHA loans only.
VA delinquency assistance
The VA offers several routes for financially stressed borrowers to avoid foreclosure, including loan modifications, repayment plans and forbearances. Under a loan modification, delinquent payments may be added to the existing loan balance and regular payments resumed. A repayment plan allows the borrower to make up delinquent payments over time on top of the regular mortgage payments. A special forbearance delays foreclosure for a time to allow the borrower to make up missed payments.
For more information, see the VA's section on Home Loans – Trouble Making Payments.
USDA loan modification
The USDA offers a limited mortgage modification option called a note modification. Only the interest rate may be changed to reduce a borrower's mortgage payments – all the other terms of the mortgage note are unchanged – there are no principle reductions, deferred principle or extensions of the loan term allowed.
Proprietary loan modification programs
Individual lenders have their own, in-house loan modification programs that follow their own guidelines and eligibility standards. Depending on the circumstances, a lender may offer a borrower this option rather than a HAMP modification or one of the other options above. These may offer less favorable terms than the borrower could obtain under HAMP, but may be the only option the servicer will allow.