What Happens When You Modify Your Mortgage?

If you fall behind with your mortgage payments, the possibility of foreclosure could cause you some sleepless nights. But it may ease your mind to know that there’s a possibility that you can forestall foreclosure proceedings and restructure your loan with a mortgage modification. When you modify your mortgage, it’s a little like starting over again. You’ll still have mortgage payments, of course, but you won’t be playing catch-up, and the Consumer Financial Protection Bureau (CFPB) notes that your new payments will be more affordable.

TL;DR (Too Long; Didn't Read)

To qualify for a mortgage modification, you'll have to submit an application to your lender and demonstrate an eligible financial hardship. If your lender approves your application, what happens next is that you'll essentially start over with a newly restructured loan and typically move forward with lower monthly payments.

Qualifying for a Mortgage Modification

Not everyone who has difficulty making mortgage payments qualifies for a loan modification, and not all lenders will extend this relief. For those lenders who will consider a loan modification, borrowers must demonstrate that they’re struggling because of a financial hardship.

Eligible hardships include disabilities, certain illnesses, loss of a job and death of a spouse. Typically, borrowers must be 60 days behind in making their payments or current but with a pressing financial hardship that poses a high probability that their payments will become delinquent.

How a Loan Modification Works

You have to apply for a loan modification, and the terms of each modification vary from lender to lender and among different loan programs. In addition to the standard financial information you provide on your application, you’ll also need to include the details of your specific financial hardship. Among other considerations, your lender will approve or deny your modification based on the amount you owe, your financial situation and your home’s value.

Although borrowers benefit from loan modifications, the CFPB notes that lenders can also benefit because these modifications provide a form of loss mitigation for them. In other words, the borrower is spared the loss of foreclosure, and the lender is spared the loss of its share of the foreclosure costs. Loan modifications can be a win-win for the borrower and lender.

If your lender approves your application for a mortgage loan modification, you’ll have a newly restructured loan. The restructured loan may have a longer term, a lower interest rate, a fixed interest rate (instead of an adjustable rate that you formerly had) or a combination of these features. Each lender bases its modification decision on a case-by-case basis, depending on the terms that are best for individual borrowers.

Loan Modification vs. Forbearance Agreement

A loan modification is not the same as a forbearance agreement. A loan modification is a long-term solution to a borrower's financial hardship, and a forbearance agreement is a short-term solution. A forbearance agreement helps a borrower catch up on missed payments and resume timely payments on the mortgage. But a loan modification completely restructures the terms of the loan without requiring a borrower to make any catch-up payments.

Loan Modification vs. Loan Refinance

Likewise, a loan modification is not a loan refinance. If you refinance a mortgage, you replace your old loan with a brand new loan. But with a mortgage loan modification, the original loan is still in place but with different terms.

Being Proactive Instead of Reactive

Sooner rather than later is a better strategy for approaching your lender about a mortgage loan modification. If you let fear of foreclosure prevent you from communicating with your lender, you run the risk of letting too much time lapse with late payments. This time lapse could prompt a lender to begin foreclosure proceedings. And even though some lenders reach out to their borrowers with a home loan modification option, you may not want to count on this.

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