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Mortgage Modification: How Does It Work?

Find out how mortgage modifications work to help you when you're struggling to make mortgage payments -- as opposed to refinancing the home loan altogether.

A job loss or another change in circumstance can make it difficult to pay your mortgage.

Falling behind on payments can put you at risk of foreclosure — but don’t assume the worst. A mortgage modification can help keep your head above water. 

A mortgage modification is a hardship program that can make it easier to afford your home loan.

However:

Modifications aren’t available to everyone, though. 

Here’s what you need to know about mortgage modifications, including how they work, the advantages and disadvantages, and how to qualify for one.

What Is a Mortgage Modification?

A mortgage modification is a mortgage relief program that changes the terms of your existing mortgage loan. 

When some people think of changing their mortgage terms, they imagine applying for a mortgage refinance. 

Refinancing is the process of replacing an existing loan with a new loan. And with a new loan comes new mortgage terms. Refinancing can help you get a lower interest rate and a lower monthly payment. You might save hundreds each month.

The problem with refinancing:

You're basically applying for a new mortgage.

Unfortunately, if you experience severe hardships — maybe after a job loss — you may not meet the requirements for refinancing.

This is where a mortgage modification helps. 

Modifications can provide the same outcome as refinancing.

But with a modification, you don’t apply for a new loan.

To save your home and keep your monthly payments affordable, the lender will adjust or change the terms of the loan. This can help you avoid foreclosure.

Modification programs may vary

There are different types of modification programs, depending on your type of loan.

For example, there’s the FHA Home Affordable Modification Program. This is for loans insured by the Federal Housing Administration. Fannie Mae and Freddie Mac have the Flex Modification Program.

How Does a Loan Modification Work?

If you’re eligible for a mortgage modification, your lender may extend the length of your mortgage term.

Let’s say you have 15 years left on your mortgage. To lower your monthly payment, the lender might extend your term to 20 or 25 years. 

Or if you’re paying a higher interest rate, the lender might reduce your mortgage rate. An interest rate reduction can also lower your monthly payment, making it easier to afford the mortgage. 

Then again, a modification could involve switching your adjustable-rate mortgage to a fixed-rate mortgage.

Adjustable-rate mortgages have interest rates that reset every year. This is after a temporary fixed-rate period. These loans are riskier because they involve unpredictable mortgage payments. 

With a fixed-rate, your interest rate remains the same for the life of the loan. This results in a predictable mortgage payment. 

Has a recent rate reset caused your adjustable rate to skyrocket? Switching your home loan to a fixed-rate mortgage (and lowering the rate) might improve affordability.

Pros

  • A lower monthly payment can create a more affordable home loan. This can provide wiggle room in your budget and reduce some of your financial stress.

  • Mortgage modification can help prevent a mortgage foreclosure. A foreclosure can have a significant negative impact on your credit score. It can remain on your credit report for up to seven years. A mortgage foreclosure can also reduce credit scores by as much as 150 to 200 points. Mortgage modifications have less of a negative impact on credit.

  • Applying for a mortgage modification can resolve a delinquency status with your home loan lender.

Cons

  • A mortgage modification may negatively impact your credit, depending on how your lender reports the modification to the credit bureaus. If lenders report the modification as a debt settlement, your credit score may drop. If it’s not reported as a debt settlement, a modification should have little impact on your credit. Even if your score drops, the impact will be less than a foreclosure.

  • Sometimes, the interest rate reduction with a mortgage modification is temporary. The lender may only reduce the rate for a specific number of months. This type of modification is best for a temporary hardship.

  • If your mortgage lender extends your home loan term to reduce your monthly payment, you’ll pay longer on the mortgage, which also means you’ll pay more interest over the life of the loan.

  • It’s important to keep up with mortgage payments after a modification. If you skip a loan payment, your bank has the right to start the foreclosure process.

How to Get a Mortgage Modification?

Unfortunately, getting a mortgage modification is easier said than done.

Only certain borrowers qualify for this provision. 

The truth is:

Mortgage lenders approve modifications on a case-by-case basis.

They’ll review your financial records and gather information about your current situation to determine whether you’re eligible. If you’re eligible, the lender will then determine the best course of action to keep your mortgage affordable.

To request a modification, you’ll need to contact your mortgage lender. Speak with someone about mortgage hardship relief.

Prepare proof and documentation

The process is not as simple as calling your lender and saying, ”I have financial problems.”

The bank will verify your claim, so expect to submit proof of your hardship. 

You can prepare by gathering the necessary information beforehand. You’ll need to provide a copy of your mortgage statement, a list of your monthly debt payments, and records verifying your current income. This can include your recent paycheck stubs or bank statements.

You must also provide the lender with details about your current situation.

You’ll likely write a hardship letter. This explains “why” you’re having trouble paying your mortgage.

Be as specific as possible. This letter should also state whether the hardship is temporary or permanent.

Keep in mind:

Some mortgage lenders will only consider a mortgage modification if you’re already delinquent on your home loan. In other words, you must have already missed one or more mortgage payments. 

Other lenders might offer this provision while you’re still current, but only when a delinquency is imminent such as after a job loss. 

Mortgage modification isn’t a fast process. It usually takes about 30 to 90 days.

The good news is that many lenders would rather modify the terms of your home loan than foreclose on the property. Foreclosures are a lengthy and costly process for mortgage lenders. It’s more advantageous for them to assist borrowers during a hardship.

Alternatives 

Although a mortgage modification can provide some financial relief, it’s not the only option when experiencing hardship.

1. Sell the home

If it’s a seller’s market, it might be better to sell your property. Especially if you’ve yet to miss a mortgage payment. This way, you avoid credit damage. 

Selling makes sense when a hardship is long-term or permanent. If you’re not eligible for a modification, this is also a great way to avoid foreclosure (and protect your equity). 

You can even look into renting out the property and keeping the home as a long-term investment. Just know that rental properties require regular maintenance and repairs, which you’re responsible to pay.

2. Refinance

Do you still have income?

If you haven’t missed a payment yet, refinancing is another alternative to modification. 

Getting a lower interest rate and extending your mortgage term can possibly reduce your monthly mortgage payment by hundreds. This can end a financial hardship, allowing you to protect your credit and save your property. 

To qualify for refinancing, your credit score must meet the requirements set by the loan program.

3. Short sale

If you can’t sell the home because you owe more than your property’s value, call your lender and ask about a short sale

This is when the lender allows you to sell the home for less than you owe the bank. A short sale will negatively impact your credit score. But the impact will be less than a foreclosure. 

In most cases, you can get another mortgage in as little as three years after a closing on a short sale.

4. Mortgage forbearance

For a temporary or short-term hardship, your lender might approve a mortgage forbearance.

This hardship program allows you to stop making your mortgage payment temporarily -- usually for a few months. 

This relief is helpful if you’ve recently lost your job or can’t work due to an injury. You can skip monthly payments until you get back on your feet without penalty.

Final Word

Struggling to pay your mortgage can be stressful and you might imagine the worst-case scenario.

The good news:

Relief is available. 

Contact your mortgage company as soon as possible to discuss your options.

Qualifying for a modification and getting new loan terms can be the key to staying in your home.