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Mortgage Loan Modification: Is It The Right Move?

4-Minute Read
Published on October 30, 2020

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. Read this article to learn what a mortgage modification is and whether it’s right for you.

What Is A Mortgage Loan Modification?

A loan modification is a change made to your loan terms. Such alterations can include lowering your interest rate, extending the time you have to repay your balance or changing your type of loan to reduce your monthly payments.

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.

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 a number of 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 one year before. However, if you do 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.

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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.

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 end the letter with a conclusion that lets the lender know you’re seeking a loan modification so you can uphold your obligation and provides 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 workout your lender presents you may or may not work for you and your finances. Therefore, it’s up to you to determine whether you’d like to accept or deny the offer.

Bottom Line

If you’re currently facing financial hardship, a loan modification can be a great tool to avoid a mortgage default. A loan modification provides you with the ability to change the loan terms of your existing mortgage to make it more affordable. However, if you’d prefer to have your current mortgage rolled into a new loan, a mortgage refinance may be a good alternative.

To find answers to all your real estate and mortgage-related questions, check out Quicken Loans® Learning Center.

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Call our Home Loans Experts at (800) 251-9080 to begin your mortgage application, or apply online to review your loan options.

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