If you’re having trouble keeping up with your mortgage payments and need more than a temporary solution, a loan modification can adjust the original terms of your mortgage to help you avoid foreclosure.
The Flex Modification program for borrowers with a conventional loan owned by Fannie Mae or Freddie Mac is a popular option — but before you permanently alter your mortgage, make sure you understand when it makes sense to get a loan modification. We’ll cover the pros and cons of mortgage modifications and highlight other options for managing mortgage payments when you’re struggling financially.
A mortgage modification changes the original terms of your home loan to make your payments more manageable. Your lender can modify your loan in a few different ways, including:
Remember: The ultimate purpose of participating in a mortgage modification program is to make changes to your mortgage that’ll help you avoid missed payments and foreclosure.
Modifications can be especially helpful for homeowners who are experiencing a hardship that doesn’t have a clear end in sight. If, on the other hand, you’re recovering from a temporary problem — say you have a short-term illness or injury, or you’ve lost your job — you may want to look at less-permanent options like mortgage forbearance or refinancing.
If you’re already participating in a mortgage forbearance program and it looks like you can’t afford any of the options that would bring your loan current after forbearance ends, a loan modification may be just what you need.
The loan modification process can vary from lender to lender, but in general most programs will require similar steps:
Step 1: Gather information about your financial situation. Having documentation about your income, PITI payment amounts, HOA payment amounts and property value at the ready will make the process a lot less frustrating.
Step 2: Reach out to your lender. Because your mortgage loan is a legal agreement between you and your lender, you can’t modify your home loan without the lender’s approval.
Step 3: Check the qualifications for loan modification. Different lenders and programs will have different requirements you’ll need to meet in order to modify your loan. Before you launch into the loan modification application process, review your program’s basic qualifications.
Step 4: Complete an application. You’ll need to submit information and documentation about your financial situation to your lender in order to help them understand why you’re experiencing hardship. Depending on the program, you may need to submit a “hardship letter” that details your situation in narrative form.
Step 5: Complete trial payments. In some cases, you may need to make a series of “trial payments,” which show the lender you’re able to make on-time payments consistently. If you fail to make these payments, you could lose your chance to modify your loan. The trial period typically lasts three to four months.
Step 6: Await the final verdict. Your lender will either approve or deny your application. If you’re approved, you’ll get an offer that details the terms of the new loan. If you’re denied, know that there are other options that can help you either afford or exit your mortgage without going through foreclosure.
One of the more common home loan modification options is the Flex Modification program offered by government-sponsored enterprises Fannie Mae and Freddie Mac. The program can provide a 20% reduction in how much you have to pay monthly toward your mortgage — but it’s only available to struggling borrowers who have conventional loans that are owned by one of these two agencies.
The Fannie Mae and Freddie Mac Flex Modification programs have many requirements that apply to borrowers in different circumstances, but in general the Flex Modification Programs require that you:
Each lender will have different requirements before they’ll consider a mortgage modification. If you’re pursuing a modification directly with your lender, they may have different or additional requirements. Be sure to verify their guidelines by reaching out for more information.
You can use Fannie Mae’s loan lookup tool or Freddie Mac’s tool to find out which agency owns your loan. If one of them does own your loan, you may be eligible for the Flex Modification program — provided you meet its other requirements.
You’ll still be able to refinance in the future
It’ll take less time to rebuild your credit after a loan modification than it would after foreclosure
It’s a long-term solution, not a short-term band-aid
Your credit score could take a hit, depending on how your lender reports the loan modification
Any missed payments from before the modification will still negatively impact your credit
You’ll still face foreclosure if you don’t keep up with your payments
Both the Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA) have mortgage modification programs for eligible borrowers.
The FHA loan modification program helps struggling homeowners by using one of the following options:
VA loan borrowers who qualify for a modification may receive help by:
If you don’t qualify for loan modification, don’t panic — you can still potentially get a refinance. Like modifying your mortgage, a refinance permanently changes your loan. However, instead of modifying the existing loan, it uses a new loan to pay off your original mortgage. You’ll then continue to make payments based on your new loan’s terms.
Learn more about getting an FHA streamline refinance.
Forbearance is a temporary pause or reduction in your mortgage payments, whereas loan modification permanently alters your loan. You can also enter loan modification after a forbearance period — the two aren’t mutually exclusive, but they are different.
One notable difference about forbearance is that, because it doesn’t alter the original loan agreement, you’re technically in mortgage default during the forbearance period. For the most part, this is a technicality that doesn’t matter as long as your lender is on board with forbearance and you’re keeping up your end of the deal during that period.
However, if you fail to do what you agreed to in the forbearance agreement, things can get messier. In some cases, when borrowers violate the forbearance agreement, the lender turns around and takes legal action against them — and uses the forbearance agreement as evidence in court to prove their case.
Even if loan modification, forbearance and refinancing all fail you, you still don’t necessarily have to go into foreclosure. Here are some alternatives:
Short sale A short sale is when your lender agrees to let you sell your home for less than it’s worth. In return, the proceeds of your home sale will go toward your outstanding mortgage debt. The debt that remains after this — called the “deficiency” — is often forgiven.
Deed-in-lieu A deed-in-lieu of foreclosure is when you hand over ownership of your house to your lender “in lieu” (or instead) of going through the foreclosure process. In return, you’ll be released from the mortgage. Lenders are often motivated enough to avoid foreclosure that they’ll strike this deal with you — and, in some cases, cover your relocation expenses to boot.
Partial claim A partial claim is a loan that covers the amount you’re behind on your mortgage payments by. The best part is that it’s interest-free, and typically won’t have to be repaid until you pay off your first mortgage in full or sell the house. The downside? It only applies to certain loan types, like FHA loans.
Bankruptcy Deciding to file for bankruptcy can be tough, but one of the best things about taking the leap is that it immediately puts a freeze — also known as an “automatic stay” — on any creditors who are trying to collect from you. This will stop foreclosure, but whether this is enough to help you keep your home, or if it’s just a temporary fix, depends on the type of bankruptcy you’ve filed for.
Remember: It’s against the law for a business that promises it’ll help you obtain a loan modification to collect any upfront fees from you before you’ve signed a new loan agreement with your lender. Do your due diligence when seeking mortgage assistance and verify that you’re receiving legitimate loan modification help. File a complaint with the Consumer Financial Protection Bureau (CFPB) online or by phone at 855-411-2372 if you believe you might be the victim of a mortgage modification scam.
