What Homeowners Need to Know about Mortgage Modification Options

If you’re facing financial difficulties and are at risk of defaulting on your home mortgage loan, you may be considering mortgage modifications. Whether it’s due to financial hardship or simply wanting a lower mortgage payment, a mortgage loan modification can be a helpful way to make your home loan monthly payment more manageable.

But what is a mortgage loan modification, and how does it work? In this blog post, we’ll answer these questions and more so that you can make an informed decision about whether a mortgage loan modification is right for you.

What is a Mortgage Loan Modification and Who is Eligible?

A loan modification is a great way to make your home loan more affordable. It’s an agreement between you and the lender that changes the original terms of your mortgage in order to provide more an affordable monthly payment.

Usually, if you are having difficulty making your mortgage payment or if your adjustable-rate mortgage has become unmanageable due to rising interest rates, your mortgage lender may be able to reduce them through a loan modification.

In order to qualify for a loan modification, lenders often require evidence of hardship from the borrower during the loan modification process. Examples of hardships may include natural disasters or prolonged disabilities; separations and divorces; as well as loss of income due to death in the family.

What is the Process for Requesting a Loan Modification

To request a loan modification, you should contact your lender directly. You will likely need to provide financial information, such as your income and expenses, and explain why you are requesting a loan modification.

The steps to getting a loan modification typically include:

  1. Contacting your mortgage lender or servicer to inquire about mortgage modification options and to request an application
  2. Providing documentation to verify your income, expenses, and financial hardship
  3. Reviewing and accepting the terms and conditions of the modification offer
  4. Completing the trial period, if applicable, to demonstrate your ability to make modified payments
  5. Signing the final modification agreement and beginning to make modified payments.

Your lender may require additional documentation or information, such as proof of hardship or a detailed budget. You should also be prepared to discuss different options for loan modification, such as a lower rate of interest or a longer loan term.

How a Loan Modification Impacts your Mortgage Payments

A loan modification by your mortgage company can have a big impact on your home loan. Depending on the type of modification, it can impact your home loan in several ways:

  • Lower interest rate: The modification may lower your rate, which will reduce the amount of your monthly mortgage payments.
  • Extension of the loan term: The modification may extend the term of your loan, which will also lower your monthly payments.
  • Principal reduction: In some cases, the lender may agree to reduce the amount of the loan balance, which will lower the monthly payments and the total interest paid over the life of the loan.
  • Forbearance: Lenders may agree to temporarily reduce or suspend mortgage payments for a certain period of time.
  • Combination of the above options: Lenders may offer a combination of the above options in order to make the mortgage more affordable.

Loan modifications vary by mortgage company and are different for every homeowner. Ultimately, taking the time to understand how a loan modification will affect your home loan is essential for making an informed decision.

How Loan Modifications Affect Your Credit

If you are up to date on your mortgage payments and a loan modification is approved that lowers your interest rate or extends the loan term, your credit score will probably not be affected.

If you are not able to make your mortgage payments, and the loan modification includes a period of forbearance or deferment of payments, your credit rating could go down. Also, if the loan modification includes reducing the amount you owe, this will be reported as “debt forgiveness” to credit bureaus and it could make your score go down.

It’s important to note that even if a loan modification negatively impacts your credit in the short term, it can help you avoid foreclosure, which would have a much more significant and longer-lasting negative impact on your credit.

Options if your Mortgage Modification is not Approved

Even if you meet the requirements on paper, the loan modification for your mortgage may not be approved. Take Susan, who fell behind on her mortgage when she went through long-term medical treatment. Even though her lender allowed for loan modifications due to illness, her request was denied.

If you have applied for a loan modification and it is not approved, you still have choices to make. The most important thing is to not put your head in the sand and ignore the issue.

If you are past due on your mortgage payments and do not qualify for a loan modification, you may consider a new loan through a new mortgage company. However, getting a new mortgage may be difficult if you do not have sufficient equity in your home or if the offered rate of interest is higher than the original loan.

Bankruptcy is another alternative to loan modifications. Bankruptcy can help relieve some of the burden and give you time to reorganize your finances. Bankruptcy also provides an immediate halt to foreclosure proceedings.

Whatever option you choose, it’s important to act quickly so that you resolve any issues with your mortgage and keep your home out of foreclosure.

Loan Modification Recap

A mortgage modification is a process where the terms of your loan are changed in order to make payments more affordable. If you’re experiencing hardship and think that you may not be able to continue making regular payments on your loan, then you may be eligible for a loan modification.

Everyone should be aware of loan modification scams to stay away from. Before applying for a mortgage modification, speak with your trusted lender or a lawyer with experience in foreclosure defense.

Remember, if you’re having trouble paying your mortgage, there are options available to help you stay in your home. Contacting an experienced attorney should be one of those options so that you can find out what specific programs or assistance may be available to you.