Money is tight or you have lost some income and now you're worried about keeping up monthly payments on your home. What can you do? One possible course is to seek a modification of your mortgage. You'll still have to pay off the loan eventually, but a modification can change some of the terms and conditions to make it easier for you to handle. The federal Department of Housing and Urban Development has several programs that can help. As of 2012, 18 states, including California, have special programs for those hardest hit. Check your lender or a state housing finance agency for options.
An unmodified mortgage is one that is paid regularly without any change in its terms or payments. Unmodified mortgages last until the loan is paid off, either at the end of the term or when you sell your house or refinance it. Interest rates, monthly payments and other provisions don't change, unless there is some alteration, such as an increase in escrow fees for taxes or insurance or provision for a graduated interest rate.
Mortgage modification is a way to get relief for homeowners who are having difficulty with or are unable to make payments under the original loan. Modification essentially is the lender agreeing to less-profitable terms, usually as an alternative to forcing you into bankruptcy or foreclosing on the house. It's a way to help you keep paying an amount on the loan you can afford.
There are different ways to modify a mortgage. A lender may agree to reduce the interest rate, temporarily or permanently, to reduce monthly payments without changing the length of the mortgage Extending the length of the mortgage, say from 15 to 20 years, also can cut payments. Some lenders offer "interest-only" modifications in which the payment applies only to the interest and not to the principal balance for a certain amount of time.
A special modification program begun in 2010 by the federal government provided $7.6 billion to help homeowners who are unemployed or otherwise hardest hit by economic conditions. In some cases, this program will reduce the principal on the loan to help homeowners get more affordable payments. You'll have to meet special qualifications for this modification.
Other Modification Options
Another federal program, the Home Affordable Mortgage Program, can lower monthly payments to as little as 31 percent of your verified monthly income. You'll have to meet special qualifications for this program, as well. Your lender or a state or federal housing agency can provide details. Your lender also can agree to modifications without federal intervention.
Refinancing is another form of loan modification, but it doesn't change the terms and conditions of your original loan. It simply substitutes a new mortgage for the original one, but usually with a longer term, better interest rate or other changes to reduce your monthly payment. Extending a mortgage from 15 to 30 years can cut a monthly payment perhaps by 30 percent, depending on how the interest rate is altered.
- Department of Housing and Urban Development: Loan Modification Frequently Asked Questions
- Making Home Affordable.gov: Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets
- Bankrate.com: Mortgage modification
- Experian: Effect of Mortgage Loan Modification on Credit Scores
- The Mortgage Professor: 40-Year Loan or Modify the 30 and 15?
Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.