If your mortgage is owned or guaranteed by either Fannie or Freddie, you may be eligible for this program. HARP has also expired. If you are struggling to make your mortgage payments, contact your lender or servicer immediately and ask about your options. Avoiding phone calls or procrastinating will only make matters worse. The loan modification application process varies from lender to lender; some require proof of hardship, and others require a hardship letter explaining why you need the modification.
Consider working with a HUD-approved housing counselor , who can assist you for free in challenging the decision and help you understand your options. One potential downside to a loan modification: It may be added to your credit report and could negatively impact your credit score. If your modification is temporary, you'll likely need to return to the original terms of your mortgage and repay the amount that was deferred before you can qualify for a new purchase or refinance loan.
After permanent modifications, lenders may want to see a record of 12 or even 24 on-time payments to determine your ability to repay a new loan. Be aware that, depending on how your loan is modified, your mortgage term could be extended, meaning it will take longer to pay off your loan and will cost you more in interest. But for homeowners on the brink of losing their homes, the benefits of a loan modification can far outweigh the potential credit risks and extra interest.
What is a loan modification? How does loan modification work? That means the amount you owe will be spread out over time with the new balance. If you extend the length of your loan, you might end up paying less in monthly payments even though you owe more toward your principal. In rare circumstances, lenders will actually lower the amount you owe, also known as a principal modification. These were more common during the housing crisis when loose lending standards prevailed and home values tanked, leaving many borrowers underwater with their mortgage.
Whether a lender decides to reduce the principal likely depends on the current local housing market, how much you owe and what their loss would be if they went this route versus a foreclosure. Some borrowers might need a combination of actions in order to make the monthly mortgage bill manageable. Depending on your need, a lender might reduce the interest rate and extend your loan so that your monthly mortgage payment is reduced in two ways, without touching the principal balance.
The lender likely will go through a cost-benefit analysis when assessing the type of modification that makes sense for both parties.
Homeowners who are facing financial hardship that makes it impossible to fulfill the mortgage contract should get in touch with their lender or servicer immediately, as they might be eligible for a loan modification. Typically, lenders will ask you to complete a loss mitigation form.
Because foreclosures are so costly for investors, a loss mitigation form helps them look at alternatives, such as loan modifications, to figure out what makes the most financial sense. If your loan modification application is denied, usually, you have the right to appeal it.
Because rules vary by lender, find out when the appeal deadline is. There are many reasons why you might not qualify, from not providing sufficient proof of hardship to having a high debt-to-income ratio DTI. Working with a housing counselor or attorney who specializes in mortgage modifications can improve your chances of getting approved for a loan modification.
If the modification is federally backed i. Otherwise, some loan modifications might be reported as settlements or judgments, which could result in a ding to your credit. Be sure to talk to your lender about if their policy is to report modifications. However, a loan modification is not as damaging as a foreclosure.
Natalie Campisi is a Los Angeles-based reporter who covers mortgages and housing news for Forbes Advisor. Previously, she was the senior mortgage reporter and analyst for Bankrate. Select Region. United States. United Kingdom.
Natalie Campisi. Forbes Advisor Staff. Editorial Note: Forbes Advisor may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations. Getty Images. What Is a Mortgage Modification? Who Qualifies for a Loan Modification? How to Modify Your Home Loan There are several ways your mortgage lender can modify your home loan, from reducing your interest rate to making your mortgage longer in order to lower your monthly payments. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.
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These changes can include a new interest rate or a different repayment schedule.
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