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Loan Modification: What Is It And How Can It Lower Your Mortgage Payments?

4-Minute Read
Published on April 7, 2021
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When your finances unexpectedly take a turn for the worse, it can be terrifying to think about how you’re going to make your monthly mortgage payments. However, you can’t let your fears of defaulting on your loan and losing your home prevent you from taking action. One possible solution is to apply for a loan modification.

In this article, you’ll learn what a mortgage modification is and whether it’s right for you. Take a deep breath and read on.

What Is A Mortgage Loan Modification?

A loan modification is a change made to your loan terms, often with the goal of lowering monthly payments. Such alterations can include: 

  • Lowering your interest rate
  • Extending the time you have to repay your balance
  • Changing your type of loan

Loan modifications are typically used to help homeowners who are struggling to make their mortgage payments due to financial hardship. Although the process can prevent borrowers from defaulting on their loans, a mortgage modification can still negatively impact their credit scores. However, in the long run, modifying your loan will likely be better for your credit than foreclosure.

Loan Modification Vs. Refinance

Both a loan modification and a loan refinance can potentially help you if you’re having difficulty keeping up with your mortgage payments. That’s because both mortgage tools can be used to lower your payments and make them more affordable. However, there are distinct differences between them that may make one option better for your circumstances.

The most important distinction is that getting a loan modification enables you to make a change to your existing mortgage, while refinancing replaces your existing mortgage with a new loan.

To obtain a loan modification, your current lender must agree to change the conditions of your mortgage. To refinance, you must submit an application to the lender of your choosing and qualify for the new loan.

Types Of Loan Modification Programs 

There are several types of loan modification programs available. While some allow borrowers to make permanent changes to their loan terms, others offer temporary fixes that make their mortgage more affordable. 

Flex Modification

For borrowers who have a loan backed by Freddie Mac or Fannie Mae, the two agencies have a shared program that assists those facing financial hardship. To be eligible, you must have originated your mortgage at least 1 year before. If you qualify, you can lower your mortgage payment by up to 20%.

FHA Programs

If you’re a first-time homeowner with an FHA loan, you could qualify for a loan modification program offered by the Federal Housing Administration. The FHA offers a variety of modification programs for eligible borrowers.

Their mortgage forbearance program enables you to defer or reduce your monthly payments for a certain number of months. After that time, you must repay the entire amount that was deferred or reduced and resume your regular payments.

VA Modification Programs

The U.S. Department of Veterans Affairs offers modification programs to veterans, active service members and surviving spouses who have a VA loan. The VA offers financial counseling to help veterans find a program that best meets their needs and works with their lenders to ensure the process goes smoothly.

Through their program, your missed payments and potential legal fees are rolled into your remaining loan balance. Then, the VA works with you and your loan servicer to come up with a new payment plan that is more appropriate to your financial circumstances.

How To Get A Mortgage Loan Modification 

Your ability to get a mortgage loan modification will partially depend on how you go about it. It’s crucial that you take the following steps to give yourself the best chance of obtaining one.

Qualifications vary depending on the program you choose, but you'll typically be asked to provide information about the following elements: 

·       Finances

·       Mortgage

·       Hardship

·       Property

1. Call Your Lender

The first step you must take is to contact your lender to inform them of your inability to keep up with your monthly mortgage payments. The sooner you reach out to your lender, the more likely they’ll be to help you find a solution.

When you speak with your lender, make sure to explain how your financial circumstances have changed and what caused the change. You’ll also want to provide them with insight as to how much you can currently afford to pay and when you believe you’ll be able to resume making your regular payments.

2. Complete A Loss Mitigation Application

Once you’ve spoken with your lender, they’ll most likely ask that you fill out a loss mitigation application. This application acts as a formal request for assistance and asks that you provide additional information about your finances.

3. Provide Proof Of Finances 

As you fill out the loss mitigation application form, you will be asked to provide proof of your finances. You should expect to include copies of your most recent pay stubs, bank statements and tax returns. You’ll also need to put together an income and expense report that shows how you spend your earnings. 

4. Write A Letter Of Hardship 

The final piece of your loss mitigation application will be a letter of hardship. This document must clearly explain why you’re having trouble making your mortgage payments.

When writing a letter of hardship, you should be sure to include a header that provides your name, contact information and loan number. In the introduction, you should specify why you’re seeking a loan modification.

Your body paragraph should concisely explain the circumstances that have made or will likely make you fall behind in your payments and why the situation is out of your control.

You should conclude by letting the lender know you’re seeking a loan modification so you can uphold your obligation, and provide the name of any financial counselor you’ve consulted during the process.

5. Accept Or Deny An Offer

After completing the application process, you will hopefully receive a modification offer. The alternative your lender presents you may or may not gel with you and your finances. That’s why it’s ultimately up to you to determine whether you’d like to accept or deny the offer.

Is Loan Modification A Good Idea For Me?

Is now the right time to modify your loan, or is there a better solution for your situation like refinancing or recasting? Taking a look at the pros and cons of mortgage modification can help you decide whether this is really the right path for you.

Pros Of Loan Modification

There are some major benefits to modifying your loan if your situation qualifies you. A mortgage adjustment can:

  • Stop an in-progress foreclosure
  • Prevent foreclosure before the process begins
  • Lower your monthly payments
  • Help you catch up on late payments
  • Stop you from falling behind on payments
  • Resolve delinquency status
  • Cause less damage to your credit than foreclosure

Cons Of Loan Modification

Unfortunately, there can be drawbacks to loan modification as well. Modifying your loan can:

  • Hurt your credit score
  • Raise your total loan amount
  • Make you pay more than your home is worth
  • Require you to pay extra fees
  • Be reported as debt settlement
  • Show that you didn't fulfill your mortgage contract
  • Still result in foreclosure, depending on your lender

Alternatives To Loan Modification

There are a few other options you can consider before committing to a loan modification. Let's take a look at refinancing, forbearance and recasting and how to decide if these are better choices for you than a mortgage adjustment.

Refinancing

As we've mentioned, refinancing is a common alternative to loan modification for borrowers who want to lower their monthly payments, but when should you opt for a refinance over a mortgage adjustment?

Not everyone is eligible for a loan modification. These are typically reserved for borrowers who are at risk for foreclosure. If you simply want more room in your budget, refinancing is probably a better bet. Refinancing is also a better idea if you want to cash out your equity.

Forbearance

Mortgage forbearance is another potential solution for borrowers who are struggling to make their monthly payments, but it isn't interchangeable with loan modification. In most cases, forbearance is not meant to make lasting changes to your mortgage.

Instead, it allows you to make temporary adjustments to your loan during a period of financial hardship. Loan modification is generally used when a short-term solution won't last long enough to help the borrower.

Mortgage Recast

Mortgage recasts involve paying a lump sum toward your principal, which can help you lower your monthly payments without changing your interest rate or term. There are several restrictions on what loans qualify for recast. This solution will only work for you if you have the money on hand to make a lump sum payment.

If you're struggling to make your monthly payments, recasting probably won't be the best route for you to take.

The Bottom Line

A loan modification can be a great tool to avoid a mortgage default If you’re currently facing financial hardship. A loan modification provides you with the ability to change the loan terms of your existing mortgage to make it more affordable.

If you’d prefer to have your current mortgage rolled into a new loan, a mortgage refinance may be a good alternative. Ready to get started? Apply for your refinance online now.

For more answers to all your real estate and mortgage-related questions, check out Rocket Mortgage® Learning Center.

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