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How does a mortgage loan modification work?

By Kathryn Pomroy
Published  December 18, 2020 5:44am CST
Personal Finance
Sponsored by Credible, which is majority owned by our parent, Fox Corporation. Credible is solely responsible for its services.
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If you’re facing foreclosure or can’t make your mortgage payments, mortgage modification is a practical option if you need home loan relief. It can be a temporary or permanent way to avoid losing your home, but it doesn’t come without a few drawbacks

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If you’re unable to keep up with your mortgage payments and find yourself stumbling down the path to foreclosure, you know how nerve-wracking it can be. Fortunately, it is possible to get some relief by checking out a mortgage modification. It is a great option to lower your monthly mortgage payments, save money and stop those bothersome collection calls.

But loan modification is not for everyone. Sometimes the cost of your loan will increase, and your credit report may suffer. But, if your home goes into foreclosure, your credit report will suffer anyway. Here's what you need to know about loan modification and how it works.

How mortgage loan modification works

Modifying your mortgage is a temporary or permanent way to avoid foreclosure. Unlike a mortgage refinance, a mortgage modification doesn’t replace your existing mortgage. Instead, it changes your original loan by adjusting the length of your loan, lowering your interest rate, or switching from an adjustable-rate mortgage to a fixed-rate mortgage, hopefully with better terms.

If you have a loan either owned or guaranteed by Freddie Mac or Fannie Mae, you may be eligible for the "Flex Modification" program. The goal of the Flex program is to reduce your mortgage payment by 20%.

However, if you're still thinking a mortgage refinance is the ideal personal finance option for you, then head over to multi-lender site Credible to compare rates and mortgage lenders. Find your prequalified rates today by inserting some simple information into Credible's tools.

WHAT TO DO IF YOU CAN'T MAKE MONTHLY MORTGAGE PAYMENTS

Is mortgage loan modification a good idea?

A mortgage modification may be a good option:

  • If you can’t qualify for a mortgage refinance
  • If you are several months behind in mortgage payments
  • If you are facing a long-term hardship and are likely to fall behind in mortgage payments

Credible can help you crunch the numbers. In just three minutes, you can get prequalified rates from multiple home mortgage lenders without impacting your credit score. See how much refinancing could save you instead.

WHAT TO DO WHEN YOUR MORTGAGE FORBEARANCE ENDS

Due to COVID-19, moratoriums on single-family foreclosures and real estate owned evictions will continue until at least December 31, 2020. What will you do on Jan.1, 2021? Before you commit to mortgage modification, use an online mortgage refinance calculator to determine your new monthly costs.

Who qualifies for a mortgage loan modification?

Mortgage modification programs vary from one lender to the next, and not everyone qualifies. Generally, you must provide evidence of financial hardship due to one or more of the following reasons:

  • Increase in housing cost
  • Natural disaster
  • Long-term disability or sudden illness
  • Loss of income because of the death of a family member
  • Loss of property not insured
  • Separation or divorce
  • Health pandemic
  • Your mortgage has been modified no more than three times in the past 

But if you’re still not sure mortgage modification is for you, visit Credible to learn more about your mortgage refinance options.

MORTGAGE REFINANCES ARE BOOMING — HERE'S WHY YOU SHOULD APPLY NOW

How can I modify my mortgage?

Although not everyone qualifies for a mortgage modification, if you do, you can modify your mortgage in several key ways.

  • You can extend the term of your mortgage, say from a 15-year term to a 30-year term.
  • You can change the type of loan — from an adjustable-rate mortgage to a fixed-rate mortgage loan.
  • You can add any past-due amounts to the unpaid principal balance. That amount will then be re-amortized over the new term of your loan.
  • Either permanently or temporarily reduce your interest rate.  

If you want to compare mortgage loan modification versus a refinance option, head to Credible. Refinancing also lowers your monthly payment (if you get a lower interest rate), so you should weigh the pros and cons before making any decisions. View different types of loans and save money today.

MORTGAGE REFINANCE VS. LOAN MODIFICATION: WHICH IS BETTER?

Pros and cons of mortgage modification

Mortgage modification doesn't come without some risks, but it also has some key benefits if you qualify.

Pros

  • You can side-step foreclosure and stay in your home
  • You can settle-up any delinquencies in payments
  • You might be able to reduce your monthly payments
  • Your credit will be less affected than if your lender foreclosed on your home
  • You might be able to change from a fluctuating adjustable-rate mortgage to a fixed-rate mortgage for the term of your loan. 

Cons

  • You may actually pay more over time if you opt for a 20-year loan to a 30-year loan.
  • What you end up owing in your loan modification program may end up being more than your house is worth.
  • You will likely pay fees to modify your loan. 
  • You may incur tax liabilities.
  • Your credit score will suffer if your lender reports your modification as a debt settlement. 
  • If you continue to make late payments or no payments on your loan modification, your lender may escalate foreclosure on your home. 

If you’re considering modifying your mortgage, check out Credible first to view loan options across multiple lenders with fewer forms to fill out.

REFINANCE YOUR MORTGAGE BEFORE IT GETS MORE EXPENSIVE