Mortgage Modification

Mortgage modification is the process in which the terms of a home loan are altered or “modified” to be more desirable from the terms that were agreed on when the mortgage loan was originated.

Through mortgage loan modification, loan terms can be updated to make paying off the loan more affordable for the borrower. Think of it as a kind of loss mitigation where the borrower will benefit from the modified loan terms, and the lender benefits by reducing the risk of the borrower defaulting on the loan. Ultimately, the point remains to lower the borrower’s monthly mortgage payments.

Is Mortgage Modification the Same as Refinancing?

Many people confuse mortgage loan modification, sometimes called a mortgage adjustment, with refinancing. The two may be utilized to yield similar results for a borrower, but in practice, they are two completely different processes. 

With a refinance, the original home loan is replaced with an entirely new loan package. The new loan may have a completely different interest rate structure, or be from an entirely different mortgage program altogether. 

With mortgage modification, the original home loan does not get replaced, rather, its terms are modified to make it more affordable without having to refinance. This foregoes the lengthy process and hardships associated with qualifying and applying for a new home loan.

How Does Mortgage Modification Work?

Unlike the refinance process, which takes your existing mortgage and replaces it with a brand new home loan, mortgage modification works a little differently. Modifying your mortgage means to take your existing mortgage and make some alterations so that it will be less of a burden to you, the borrower. The goal of mortgage modification is to make the loan terms more favorable to you so that you are less likely to default on the loan. In other words, mortgage modifications are meant to decrease your monthly mortgage payments.

In the mortgage modification process, it is up to the lender to decide what terms will be altered and by how much. Typically they focus on whatever will work out best for you and your financial situation, since the alternative could very well end in foreclosure, which can be an extremely expensive process for a lender. 

What Terms Are Altered in a Mortgage Modification?

Loan modification programs vary depending on the lender, but there are a few key modifications that can be made to accomplish the desired results. Most mortgage modifications involve one (or a combination) of the following:

• Extending the term length: A longer loan term means more time to pay off the principal amount, and lower monthly payments. The downside is that you will be paying more in interest over time.

• Switching from an adjustable interest rate to a fixed interest rate: Variable interest rate mortgages can get pretty expensive pretty quickly depending on the market. Simply switching to a fixed rate of interest to avoid this volatility is enough for many borrowers to regain some control over their mortgage payments.

• Reducing the interest rate: A lower interest rate can be the difference between making payments on time or defaulting on your home loan. Lower interest means lower monthly payments, and all around lower cost for your mortgage loan.

• Reducing the principal amount due: This is the thorn in any lender’s side, but some may still agree to removing a portion of your principal debt in order to recalculate and lower your payments. Be careful though, as you may still need to pay taxes for the debt reduction.

• Postpone payments: A quick fix to a bigger issue, skipping a few payments without penalty can give some borrowers enough time to get their finances in order and save their mortgage. The payments that are missed are simply added to the end of the loan, increasing the term by a few months.

How to Get a Mortgage Modification

If you are considering a mortgage loan modification, it all starts with a call to your lender. Discuss the reason behind seeking assistance and ask about your options. Many homeowners are scared to discuss this in fear that the lender will automatically try to muscle them out of their residence. Rest assured that this is not normally the case. 

Majority of lenders are not only willing to help borrowers, but have loan modification programs for that very reason. In fact, some lenders will actually reach out and try to contact their borrowers who are at risk for foreclosure to offer a modification and save the borrower from losing the property.

In either case, once you have discussed your options with your lender and have settled on a mortgage loan modification, lenders will typically need you to fill out a formal application, and will most likely inquire about your finances. This may include requesting documentation to shed some light on your income, your expenses, and the reason behind your financial hardship.

Once you have complied with all of your lender’s requests, they will need time to process your application. Be warned that processing times vary depending on the lender, and it is important to remain calm and follow any additional instructions that the lender may have, particularly regarding making payments on your mortgage during the wait if possible. It is not uncommon for the process to take a few weeks before receiving your approval or denial.

How to Qualify for a Mortgage Modification

Mortgage modification isn’t available to just anyone. Every mortgage modification program is different, so you will have to do some research and speak with your lender to find out what the eligibility requirements are to get your home loan modified. Typically, lenders look for a few things before even considering a modification. These include (but are not limited to):

• Delinquency of at least 60 days on a mortgage payment

• A mortgage that is deemed to be in “imminent default”

• Borrower who has undergone some financial hardship such as a loss of employment, a death, serious illness, or a divorce

Mortgage Modification Programs

If you find that you are having a hard time making your mortgage payments, do not hesitate to seek help from your lender. Many lenders have some form of an in-house mortgage adjustment program in place. Depending on the lender or program, the modifications may be temporarily put in place to help you catch up with and stabilize your monthly mortgage payments, or permanent to ensure that you will be able to pay off the loan or at least make payments until you can refinance or sell the property. 

Not too long ago, the government’s Home Affordable Modification Program (HAMP) sought to reduce monthly mortgage payments for borrowers who were facing financial hardships. However, the program (which was instituted in 2009) expired back in December of 2016. Luckily, many of the in-house mortgage modification programs still use HAMPs guidelines for helping borrowers.  

Flex Modification Program

For borrowers with mortgages under Fannie Mae or Freddie Mac, another option currently exists. Touted as a program to help prevent foreclosure, the Flex Modification Program was created in late 2017 with the goal of being a more modern take on HAMP, with more flexible borrower criteria than its predecessor. The program is meant to reduce monthly mortgage payments by up to 20%. 

Eligibility for the Flex Modification Program

In order to modify the terms of your mortgage through the Flex program, there is some important criteria that must be met first. Eligibility requirements include (but are not limited to):

• Your home loan must be guaranteed or owned by Fannie Mae or Freddie Mac. Mortgages insured by other government agencies such as FHA Loans, VA Loans, and USDA Loans do not qualify under the program’s guidelines.

• You must have a monthly mortgage payment that is 60 days or more past due on a primary residence, investment property, or second home.

  • This does not have to be the case if your lender decides that your mortgage is in a state of “imminent default”. This means that your lender has deduced that you will not be able to afford the monthly cost of your mortgage any longer.

• The mortgage must be no less than one year old.

• You must have a first-lien mortgage, which entitles your lender to be paid first in the event that you default on the mortgage loan.

• Your property is allowed to be condemned or vacant and still eligible to qualify.

How to Apply for the Flex Modification Program

If you are in need of assistance in making your mortgage payments and meet the above eligibility requirements, then applying for the Flex modification program could be the perfect solution. Applying for the program is incredibly straightforward. All you will need to do is inquire about and submit a borrower response package which is comprised of:

• A borrower assistance form that you must fill out completely

• A completed and signed request for an IRS individual tax return transcript

• Proof of Income Documentation (W-2, Paystubs, etc.)

  • Note that unemployment income is not acceptable under the program, and will most likely lead to 6 months of unemployment forbearance instead of a loan modification.

• Proof of a cause for financial hardship such as a death, illness, loss of employment, or divorce.

Completing the required forms and providing the documentation mentioned above will get you on your way for consideration for the program.

Drawbacks of Mortgage Modification

Make no mistake, mortgage modification is sometimes the only thing standing between a homeowner in a financial crisis and foreclosure. If you are having trouble making mortgage payments, there is no question that qualifying for a mortgage adjustment and being approved could save your home. No matter what, losing your home is a worst case scenario for a lot of people, so anything that can be done to prevent that outcome should be at least considered, regardless of any drawbacks.

That being said, mortgage modification is not without its faults, like: 

Extended Loans Terms

Many modification agreements result in extensions of the loan term, sometimes up to 60 years. While that may drastically reduce mortgage payments, it could mean taking a lifetime to pay off a single debt. Making payments for that long is a hindrance to any savings you could be making towards retirement, or tuition fees for your children (if you know the joys of parenthood).

Balloon Payments

Some modifications leave you with a balloon payment to be made after a set period of time. As you can imagine, getting stuck with a $15,000 payment after struggling to make a standard monthly payment is a literal nightmare for many people, so be sure to scrutinize every line of a mortgage modification agreement before signing. It pays to know what you are signing up for.

Changes to Your Credit Report

In terms of your financial profile, applying for a mortgage modification is almost always noted in your credit report. Granted, this is way better than foreclosure or bankruptcy, but it still does have a negative impact on your future borrowing power.

It Won’t Stop the Foreclosure Process

Most importantly, applying for a loan modification does not necessarily mean stopping the foreclosure process. Many borrowers mistakenly think that just because they are applying for a mortgage modification with their lender, that they do not have to worry about the deadlines associated with foreclosure. This is the most dangerous mistake to make for many borrowers, as they may not even be approved, and are still running out of time while actively awaiting the lender’s decision.

It may feel like a deliberately malicious thing for the lender to do, but there is actually no requirement for a lender to stop pursuing the foreclosure process even while trying to help you. In the end, they too must safeguard their best interests. This is why it is extremely important to not only stay ahead of your mortgage payments, but to seek help as soon as possible in order to prevent the worst case scenario. Waiting until the last minute is never a good idea. 

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