When you take out a mortgage loan, the payoff terms are generally long -- 15 to 30 years. At the time the loan originates, you might be financially prepared to meet the repayment obligations. However, much can change in 15 or 30 years, and financial hardships can happen. Not being able to pay your mortgage can result in losing your home to foreclosure. A mortgage modification might save you from foreclosure while making the monthly payments more manageable for your budget.
Loan modification programs take the existing mortgage loan and alter the terms -- such as interest rate and repayment term -- to reduce the monthly payments. Unlike refinancing, modifications are not new loans. Banks and mortgage lenders provide these modifications to their borrowers. Additionally the government sponsors the Home Affordable Modification Program (HAMP). Homeowners seeking a modification need to contact their lender to determine eligibility.
If you find yourself facing a financial struggle, contact your lender as soon as possible to discuss modification options. Some lenders might be willing to modify your loan before you actually start missing payments, but others might not. The lender will send you paperwork to begin the modification process. You'll likely be required to submit financial documents, such as pay stubs and tax returns. Additionally, you'll be asked to explain why you can't afford the monthly payments anymore. This explanation is often called a "letter of hardship."
Modifications provided through your lender or bank have specific qualification criteria. You must discuss the criteria with the lender. HAMP is available nationwide and has universal qualifications. To be considered for HAMP, your mortgage loan must have originated before January 1, 2009. In addition, the total unpaid balance can't exceed $729,750 for a single-family home. The limit is higher for multi-unit properties. Your current income needs to be enough to afford the proposed new payment.
If you're approved for a mortgage modification, there will be a trial period before the modification is finalized. The trial period is usually a few months; during this time, you must make all of the newly structured payments on time. If the trial is successful, the lender will permanently modify your mortgage loan and the monthly payments. One point to consider is that after the modification, your credit score might suffer. If you don't miss any mortgage payments through the modification, you're probably safe. Missing a mortgage payment is reported to the credit bureaus, and your score will suffer. Your credit score will eventually rebound if you continue to pay your mortgage and other bills on time.
- Zillow: What is a Loan Modification?
- U.S. Department of Housing and Urban Development: Loan Modification Frequently Asked Questions
- Making Home Affordable: Home Affordable Modification Program
- FHA.com: What Happens Once I am Approved for Loan Modification?
- Bankrate: Mortgage Loan Modifications and Credit Scores