What Is a “mortgage Modification” and When Should You Get One?
If you’re struggling to make your monthly mortgage payments due to financial difficulties, a loan modification may provide much-needed relief. A mortgage modification is a permanent change to the terms of your loan, agreed upon by your lender, to make payments more affordable and help you avoid foreclosure.
What does a mortgage loan modification look like?
Common ways to modify a loan include:
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Lower interest rates, even temporarily
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Extending the loan term to spread costs over several years.
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Adding missed payments to your loan balance
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Switching to another program or loan type
The ultimate goal of the modification is to provide you with a more affordable payment based on your current financial situation. Lenders are often willing to modify loans for borrowers facing legitimate hardships rather than going through the costly foreclosure process .
What can be called a difficulty?
To qualify for a mortgage modification, you need to prove that you are facing genuine financial hardship that affects your ability to pay. Difficulties that may qualify include:
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Loss of a job or decrease in income
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Uncontrollable rise in housing costs
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Excessive debt or monthly obligations
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Divorce or death of a spouse
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Serious illness or disability
Your lender will need documentation of your hardship, as well as details of your income, assets, expenses and other debts. Missing mortgage payments already often strengthens the case for making changes.
How to Apply for a Loan Modification
The first step is to contact your mortgage servicer (the company you make your monthly payments to) and ask specifically about their loan modification programs. Many participate in government-sponsored programs that have specific eligibility criteria.
You will need to complete a Change Application Package with detailed documentation of your hardship, income, assets, and any other information requested. Be prepared to provide evidence in the form of documents such as tax returns, pay stubs, bank statements, invoices and more.
Your servicer will do the calculations to determine the most affordable modified payment plan they are willing to offer based on your specific situation and loan characteristics. You may be required to attend credit counseling or successfully complete a payment trial before the change becomes permanent.
If approved, the new amended terms will be documented and made permanent. Although your credit will suffer, loan modification is better in the long run than foreclosure or bankruptcy for your credit score.
Even if you’re not yet behind on your payments, but you see financial problems ahead, it’s best to proactively work with your service provider on a solution rather than falling behind. Being open about your struggles and exploring your options for change early can help you avoid further setbacks and stay in your home longer.