What Is a Mortgage Loan Modification?

Mortgage loan modifications can help homeowners who are having trouble making their mortgage payments or who have fallen behind on their loans. A loan modification lowers monthly payments to make them more manageable.

Loan modifications are only for borrowers who have missed mortgage payments or who have experienced a financial hardship, like a job loss, a death in the family or a natural disaster, that jeopardizes their ability to pay their mortgages. If you’re in this position, here’s what to know about getting a mortgage loan modification.

A loan modification alters your current mortgage to make it more affordable. That could mean extending the length of the mortgage so that your payments are spread out over more time, lowering your interest rate or forgiving part of your principal.

A modification is different from a mortgage refinance. Refinancing entails replacing your loan with a new mortgage, while a loan modification changes the terms of your existing loan.

A loan modification also isn’t the same as mortgage forbearance. With forbearance, you’re temporarily allowed to skip payments or make lower payments while you’re undergoing financial difficulty. Loan modification is permanent. Forbearance is often a step mortgage servicers or lenders will have borrowers go through before considering a loan modification.

Not everyone struggling to make a mortgage payment can qualify for a loan modification. In general, homeowners must either have missed mortgage payments or be in a financial situation where there’s a high likelihood of missing a payment. Homeowners who are coming out of forbearance but unable to resume regular mortgage payments are also often eligible for loan modifications.

Financial situations that could qualify include the loss of a job, loss of a spouse or a disability or an illness that has affected your ability to repay your mortgage on the original loan terms.

If you are struggling to make your mortgage payments, contact your lender or servicer as soon as possible to ask about your options. Delaying will only make matters worse. Your application for a mortgage modification must be submitted at least 90 days before a scheduled foreclosure sale; otherwise, you give up your right to an appeal.

If you’re anxious about contacting your lender about a loan modification, keep in mind that it’s in your lender or servicer’s interest to work with you. Foreclosure is a lengthy process that’s costly for the lender, so they’re better off if you’re able to stay in your home.

The loan modification application process varies from lender to lender, but you’ll almost always start by talking to a customer service representative or someone in their loss mitigation department. Be sure to document all contact you have with your lender or servicer — note dates and times, who you spoke with, and write down any specifics. If they’ll email you information, so you have a paper trail, even better.

Your servicer may ask you for a letter describing your hardship or for proof of hardship. That might include pay stubs or tax returns documenting a loss of income or a divorce decree to show that your spouse is no longer contributing.

You should hear back from the servicer within 30 days. Make sure you’re comfortable with how the loan will change and what your new payments will be before agreeing to the modification.

If you’re denied a loan modification, you can file an appeal with your mortgage servicer. You’ll need to do so within 14 days of receiving the denial. A HUD-approved housing counselor can assist you — for free — with challenging the decision.

The loan modification you’re offered will likely depend on the type of home loan you have. Conventional loans, which are held by Freddie Mac and Fannie Mae, have different modification programs from government-backed loans like FHA loans and VA loans. Here are the basics.

If you have a conventional loan, you may be eligible for a Flex Modification from Freddie Mac or Fannie Mae. Depending on how much you owe on your home and what you’re able to comfortably pay, your loan could potentially be extended for as long as 40 years — that means paying more total interest over time, but paying less out of pocket each month. You’ll go through a trial period to make sure the new payments will work for you before the loan modification officially begins.

Loans backed by the Federal Housing Administration may qualify for a couple of loan modification options. The FHA has expanded its COVID-19 relief options to all homeowners, whether or not their hardship is pandemic-related.

The COVID-19 Advance Loan Modification changes your mortgage’s terms to achieve at least a 25% reduction in principal and interest. If you’re eligible, your servicer may simply mail you the documents to sign and return — another reason to stay on top of mortgage-related correspondence.

Another program, the COVID-19 Recovery Modification, adds any missed mortgage payments to the loan amount and extends the loan for up to 40 years at current interest rates. A separate Payment Supplement program can help cover costs of a higher interest rate, if applicable.

The Department of Veterans Affairs offers a standard loan modification option for VA borrowers. A VA loan modification allows you to add your missed payments, as well as any legal expenses, to your loan amount, which is then reamortized — in other words, started over on a new schedule.

A loan modification has tremendous upside, since it can help you avoid foreclosure and keep your home. But there are downsides to be aware of with a modification.

One potential consequence of a loan modification: It may be added to your credit report and could negatively impact your credit score. The resulting credit dip won’t be nearly as significant as a foreclosure’s effect on your credit, but it could affect your ability to qualify for other loans.

You’ll need to be sure you want to stay in the home, as you’ll have to establish a track record of timely mortgage payments before you can buy another home or refinance. After a loan modification, lenders may want to see a record of 12 or 24 on-time payments to determine your ability to repay a new loan.

Be aware that, depending on how your loan is modified, your mortgage term could be extended, meaning it will take longer to pay off your loan and will cost you more in interest. Modification programs that offer loans at current interest rates can also increase your payment if the interest rate you had was on the low side.