A mortgage loan modification can offer an opportunity for borrowers to get their monthly payment on their mortgage reduced to an amount they can afford. A mortgage loan modification may extend the years you have to repay the loan, reduce your interest rate, reduce your principal balance or change the overall structure of the loan.
A loan modification is a long-term financial relief option if you can’t repay your current mortgage on the original schedule. You'll need to be approved by your lender to qualify, but if qualified, it could help you avoid foreclosure. Read on to understand how mortgage loan modification works.
Key Takeaways
- Mortgage loan modification is a process that allows homeowners to make changes to their existing mortgage terms to make their payments more manageable.
- There are various options for modifying a mortgage, such as lowering interest rates, extending the loan term or even reducing the principal balance.
- Homeowners facing financial hardship, such as job loss or medical emergencies, may be eligible for mortgage loan modification.
How Does a Mortgage Loan Modification Work?
Mortgage loan modification is a process in which the terms of a mortgage loan are modified or changed to make it more affordable for the borrower. This usually involves reducing the interest rate, extending the loan term or forgiving a portion of the principal balance. This can relieve the pressure or obligations on the borrower and help them avoid foreclosure.
Options for a Loan Modification
By understanding the available options and working with your lender, you can potentially find a viable solution to alleviate your financial burden and secure your home.
Interest Rate Reduction
The lender lowers the interest rate on the loan. This can significantly reduce monthly payments and make the loan more affordable.
Loan Term Extension
The repayment period is lengthened, typically from 30 to 40 years. This can result in lower monthly payments, ma king it easier to manage your finances and avoid foreclosure. However, extending the term of the loan may also increase the total amount of interest paid over the life of the loan.
Principal Forbearance
A portion of the principal is set aside, interest-free, to be paid later. This reduces the amount on which interest is charged, lowering monthly payments.
Principal Reduction
The lender agrees to forgive part of the loan's principal balance. This decreases the overall amount owed, potentially bringing the loan back to a positive equity position.
Fixed-Rate Conversion
An adjustable-rate mortgage is converted to a fixed-rate loan. This is commonly done to provide stability in monthly payments, as fixed-rate mortgages have the same interest rate for the entire loan term. By converting to a fixed-rate mortgage, you can avoid fluctuations in payments caused by changes in interest rates.
Temporary Payment Reduction
The reduced payment amount is typically for a specific period of time, often 3-12 months, after which the original payment amount may be reinstated or adjusted based on your financial situation.
Capitalization
Missed payments are added to the loan balance. This brings the loan current without requiring a lump sum payment for arrears.
Loan Modification vs. Refinance
Loan modification and refinance are two different processes. A loan modification changes the original terms of your mortgage loan but doesn’t pay off your current mortgage or replace it. A refinance means you get a new mortgage and pay off your current mortgage in full. This allows you to potentially secure a lower interest rate or better terms.
Another key difference between loan modification and a mortgage refinance is the impact on your credit score. A mortgage modification may negatively impact your credit score, while a refinance typically will not have a significant credit score impact.
Finally, you can only get a loan modification through your current lender, so you won't be able to compare offers. With a mortgage refinance, you can compare offers from many lenders to secure the best possible terms.
How to Qualify for a Home Loan Modification
You must meet specific lender or program requirements to qualify for a home loan modification. Qualification requirements vary by lender or mortgage loan modification program. Generally, borrowers must demonstrate financial hardship, provide proof of income and show that they cannot afford the current mortgage payments.
You also may need to provide proof of debt, liabilities or other reasons you cannot meet the requirements for the mortgage payments. Commonly, you must meet three criteria to qualify for a home loan modification:
- You are at least one month behind on your loan or about to miss a payment
- Have a significant financial hardship
- Live in the home as your primary residence
Examples of significant financial hardship include:
- Divorce
- Natural disaster
- Long-term illness or disability
- Death of an income-providing family member
- Sudden hikes in housing costs like property tax
How to Apply for a Mortgage Loan Modification
Every loan provider has its own standards and requirements for mortgage modification. Here is the step-by-step process of applying for mortgage loan modification.
- Inquire with your lender about mortgage modification requirements. These typically include proof of financial hardship and that the home is your primary residence.
- Provide required documents, including proof of income, most recent tax return, bank statements and a hardship statement. This may also include medical bills, a termination letter or other supporting documentation.
- Contact the lender to apply for a mortgage modification.
- If the lender refuses the mortgage modification, you can also inquire about a mortgage refinance.
How Long Does a Loan Modification Process Take?
The length of the mortgage loan modification process can vary depending on the lender and individual circumstances. In some cases, it could take three to six months, but this depends on the lender's process and whether it offers streamlined loan modification.
Alternative Options for Home Loan Modifications
Remember that you have options. If you do not qualify for a mortgage loan modification, there may be alternatives to consider. First, there is always the option to refinance the loan. With a refinance, you can get longer terms, lower interest rates or better terms.
In addition, you could apply for a forbearance or repayment plan or explore government programs such as the Home Affordable Refinance Program (HARP) or the Home Affordable Modification Program (HAMP). Government assistance programs can offer you short-term relief or affordable refinance options. Learn more about HAMP here.
Should You Apply for a Mortgage Loan Modification?
Applying for a mortgage loan modification is a last resort when you're facing financial difficulties. When necessary, it can offer relief to carry through the challenging time and allow you to reduce the risk of foreclosure and protect your home. Depending on your situation, you can also consider a loan refinance or government assistance programs. If you want to refinance, find the best online mortgage lenders or best lenders for poor credit here.
Frequently Asked Questions
Will a mortgage loan modification affect my credit score?
Yes, a mortgage loan modification can affect your credit score. How much it affects your credit score can vary based on other factors. Over time, you can rebuild your credit score with regular mortgage payments and work to reduce any other debts.
Are there any costs associated with a home loan modification?
You don’t have to pay closing costs with a home loan modification. As this is a hardship modification, it’s understood that the borrower can’t pay more for the loan.
Can I apply for a mortgage loan modification if my loan is in default?
You can apply for a mortgage loan modification if you have missed payments for the mortgage. But if the loan has already entered the foreclosure process, it may be too late to apply for a mortgage loan modification. You can inquire with your lender about possibilities.
About Alison Plaut
Alison Plaut is a personal finance and investing writer with a sustainable MBA, passionate about helping people learn more about wealth building and responsible debt for financial freedom. She has more than 17 years of writing experience, focused on real estate and mortgages, business, personal finance, and investing. Her work has been published in The Motley Fool, MoneyLion, and she regularly contributes to Benzinga.