What Is a Loan Modification?

If you are behind on your mortgage or about to be, a modification can make the loan affordable without refinancing.

What can change

• Lower interest rate
• Longer loan term, such as extending to 40 years
• Adding past-due amounts to the principal (capitalization)
• Deferring part of the principal to the end of the loan, interest-free
• In some cases, principal reduction

The goal is a payment you can sustain.

Who qualifies

Servicers and investors (such as Fannie Mae, Freddie Mac, FHA, VA or USDA) set criteria. Typically:

• A financial hardship, such as job loss, illness, divorce or death of a co-borrower
• Enough income to make the modified payment
• The home is your primary residence, for many programs

How to apply

1. Call your servicer's loss mitigation department and ask for an application.
2. Submit a complete application: income documents, bank statements, tax returns, a hardship letter, and expense information.
3. Keep copies and proof of delivery.
4. Respond quickly to requests for more documents.

Federal rules require servicers to acknowledge applications, tell you what is missing, and evaluate complete applications for all options available. A complete application submitted more than 37 days before a scheduled foreclosure sale generally must be evaluated before the sale can proceed (12 CFR 1024.41).

Trial period

Many modifications begin with a trial payment plan, often three months. Make every trial payment on time; then you sign the permanent modification.

If you are denied

The denial must explain why, and in many cases you can appeal within a short period (12 CFR 1024.41). Ask whether other options are available, such as a repayment plan, forbearance or short sale. Chapter 13 bankruptcy is another way to catch up; see Chapter 7 vs. Chapter 13.

Cost and credit effects

Servicers generally do not charge to apply. A modification may affect your credit, but less than a foreclosure.

Avoid scams

It is illegal for most companies offering mortgage relief to collect fees before you have a signed modification from your lender (12 CFR 1015.5). Be wary of anyone telling you to stop paying your mortgage or to send payments to them. HUD-approved housing counselors help for free.

A bankruptcy lawyer or real estate attorney can help if your servicer mishandles the application. See also foreclosure.

Sources

1. Cornell Law School LII: 12 CFR 1024.41, Loss mitigation procedures
2. Cornell Law School LII: 12 CFR 1015.5, Prohibition on collection of advance fees (mortgage assistance relief services)
3. Consumer Financial Protection Bureau: Mortgages