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Erik J. Martin
Erik J. Martin is a Chicago area-based freelance writer/editor whose articles have been featured in AARP The Magazine, Reader's Digest, The Costco Connection, The Motley Fool and other publications. He often writes on topics related to real estate, business, technology, health care, insurance and entertainment.
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Jeffrey L. Beal, president of Real Estate Solutions, has 40 years' experience in multiple phases of the real estate industry.
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Loan modifications are a long-term financial relief option for homeowners who can’t make their mortgage payments. If approved by your lender, this option can help you avoid foreclosure by lowering your interest rate, changing the structure of your overall loan or both.
A loan modification is the process of permanently changing your existing mortgage so it’s easier to manage. The goal of a mortgage modification is to reduce your monthly payments to an affordable level, helping you stay up to date on the loan and in your home. This relief option is designed for borrowers experiencing long-term financial hardship, such as a permanent disability.
Lenders allow borrowers to modify loans because the alternative — default and foreclosure — are more costly to their business. In other words, they don’t want the house, but they do want the loan repaid. A modification helps accomplish both goals.
There are several avenues to make your mortgage more affordable, and your options could differ based on the type of loan you have (more on that below). In general, your lender or servicer might implement one or more of these modification options:
To qualify for a loan modification, you’ll typically need to meet these three requirements, at minimum:
Before contacting your servicer, consider whether the hardship requires a long- or short-term solution. If you foresee being able to repay your current mortgage in the future, your servicer might offer you forbearance or another relief option instead.
Along with providing your servicer bank and other financial statements to show reduced income, put together a letter explaining the circumstances of the hardship.
Contact your servicer’s loss mitigation department and ask for a loan modification. Keep a careful record of the representatives you interact with and get everything in writing. If you’re denied the modification, you might be able to ask for a second review if you applied at least three months before your home’s foreclosure sale.
If you’re approved for the modification, compare the total payments under your original loan to the total payments under the mortgage modification. What you don’t want is a temporary reduction and the reduced amount added back onto your mortgage balance.
In addition, avoid any modifications that are interest-only and adjust to a higher rate, add unnecessary costs to your loan in the form of penalties, fees or processing charges or result in a large balloon payment due after a certain period, says Rick Sharga, president and CEO of CJ Patrick Company, a real estate consulting firm in Trabuco Canyon, California.
Make sure you understand the new monthly payment, when it’s due and any long-term implications for your finances.
If you've experienced a permanent loss of income and are falling behind on your mortgage, a loan modification might be right for you. — Andrew Dehan, Writer, Bankrate
A mortgage loan modification is a solution for borrowers facing long-term financial hardship. If you’re struggling to make your mortgage payments and don’t foresee changes to your income, work with your lender or servicer to see if a loan modification is the best strategy for you.
“If you’ve experienced a permanent loss of income and are falling behind on your mortgage, a loan modification might be right for you,” says Andrew Dehan, writer for Bankrate.
Unless your lender reports your mortgage “paid as agreed,” a loan modification can hurt your credit score. “Loan modification can affect your credit score, but it depends on how the servicer — the company that collects your mortgage payments — reports it to the credit bureaus,” says Matt Hackett, chief operating officer for Equity Now, a mortgage lender headquartered in Mamaroneck, New York. “It is worth asking your servicer this question when you are pursuing a loan modification.”
Modifying your mortgage simply revises the terms of your mortgage contract. It doesn’t impact your ability to refinance a mortgage in the future. “You can refinance after a loan modification, and the guidelines vary across the different loan types,” says Hackett. “In some instances, a lender may look for 12 months of on-time payments after a modification before you can refinance. This varies, however, and is also based on whether you were paying on time before the modification.”
Depending on the type of modification you pursue, it can result in more interest. “If the modification means extending the term of the loan — which is often the case — you will pay more interest,” says Seth Bellas, a producing branch manager for Churchill Mortgage in Michigan. “A common modification is taking the amortization of the loan from 30 years to 40 years, which would mean you are paying the principal at a slower rate, and thus paying more interest.”
Mortgage loan modification scams are designed to take your money with the false promise of preventing foreclosure. “Scam artists offer to act as an intermediary between the homeowner and the lender,” says Bellas. “Some of the tactics they use include asking you to sign your title over to them, or telling you to stop making payments to your current lender.”
A scammer might also request money upfront or encourage you to sign paperwork that is intentionally confusing. If you are asked to do any of these things, consider it a red flag and do not proceed. Remember: If it sounds too good to be true, it is too good to be true.
No, you do not need a lawyer to obtain a loan modification agreement. However, if you would like assistance navigating the process more effectively or you’re unclear about any part of the process, working with a lawyer who specializes in modifications might be a helpful step.
Arrow Right Contributor, Personal Finance
Erik J. Martin is a Chicago area-based freelance writer/editor whose articles have been featured in AARP The Magazine, Reader's Digest, The Costco Connection, The Motley Fool and other publications. He often writes on topics related to real estate, business, technology, health care, insurance and entertainment.
