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Struggling to make your mortgage payments? You’re not alone Loan modifications can provide relief by changing the terms of your mortgage. As of January 2023, over 2 million homeowners have received permanent loan modifications This practical guide explains the most common types of mortgage modifications and how they work.
What Is a Loan Modification?
A loan modification permanently alters your existing mortgage to make it more affordable and prevent foreclosure. It’s different than refinancing, which replaces your current mortgage with a new loan. Loan modifications are for borrowers facing financial hardship who can’t pay their mortgage as originally agreed.
Modifications can:
- Lower your interest rate
- Extend your repayment term
- Forgive part of what you owe
- Waive late fees
Lenders have incentive to modify loans rather than foreclose since foreclosures are costly Contact your lender immediately if you’re struggling so you can discuss modification options
Interest Rate Changes
Lowering your interest rate is one of the most common loan modification types This reduces your monthly payment so more of what you pay goes to paying down principal rather than interest.
For example, dropping your rate from 6% to 4% on a $200,000 loan cuts your payment by about $250 per month. Over 30 years, that’s nearly $90,000 in interest savings.
Lenders may also switch you from an adjustable rate to a fixed rate through modification. This provides payment stability since your rate and payment won’t vary month-to-month or year-to-year.
Term Extensions
Lengthening your repayment term spreads payments over more years, lowering the monthly amount due.
Extending a 30-year mortgage to 40 years drops the payment over 20%. That makes a huge difference for struggling borrowers.
However, you pay more interest over the life of the loan with a longer term. Be sure you can afford the home long-term before agreeing to this type of modification.
Principal Reductions
Lenders can forgive or “forgive” part of what you owe through a principal reduction. This immediately lowers your balance, which reduces interest and typically your monthly payment as well.
Principal reductions provide instant equity since you suddenly owe less than your home is worth. This helps borrowers who owe more than their home’s value (are underwater on their mortgage).
Principal reductions aren’t common with major lenders but may be offered by smaller portfolio lenders who hold loans themselves rather than selling them to Fannie Mae or Freddie Mac.
Late Fee Waivers
If you’ve missed payments and racked up late fees, your lender may agree to waive these as part of a modification. This removes fees you incurred for being delinquent, eliminating what you owe beyond the mortgage itself.
Waiving late fees is usually combined with the other modification options above to make your loan affordable.
Pros and Cons of Loan Modifications
Modifications offer many benefits:
Pros:
- Avoid foreclosure
- Lower monthly payments
- Get current on your mortgage
- Build equity faster (with principal reduction)
Cons:
- Credit score may temporarily drop
- Owe more interest over loan’s life (with term extension)
- Home harder to sell or refinance afterwards
For most struggling homeowners, the advantages far outweigh the downsides. Damage to your credit is minor compared to the impact of foreclosure. And staying in your home is likely your top priority.
Modification Programs by Loan Type
Modification options depend partly on whether you have a conventional, FHA, or VA mortgage. Here are key programs for each:
Conventional: Fannie Mae and Freddie Mac Flex Modification
FHA: COVID-19 Advance Loan Modification, COVID-19 Recovery Modification
VA: VA Affordable Modification
The lender will assess your situation to determine which program you qualify for. Be sure to ask your lender about all modification possibilities for your loan type.
Alternatives to Loan Modification
If loan modification isn’t an option, alternatives to explore include:
- Forbearance – Temporary payment reduction or pause
- Repayment plan – Pay back missed payments over time
- Loan refinancing – If you can qualify for better terms
- Selling your home – If moving makes more financial sense
As a last resort, you may have to consider options like bankruptcy or deed in lieu of foreclosure. Meet with a housing counselor to understand all alternatives if you can’t get a mortgage modification.
Takeaway
The most common types of loan modifications are interest rate reductions, term extensions, principal reductions, and late fee waivers. Modifications make mortgages more affordable for homeowners facing hardship. Explore modification as soon as possible if you’re struggling with payments to avoid foreclosure. With the right mortgage modification, you can get relief and keep your home.
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- Loan modifications are a long-term mortgage relief option for borrowers experiencing financial hardship, such as loss of income due to illness.
- A modification typically changes the loan’s rate, term or both to make monthly payments more affordable.
- If you’re seeking to modify your mortgage, you must provide proof of hardship to your mortgage lender or servicer.
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.
How to qualify for a mortgage modification
To qualify for a loan modification, you’ll typically need to meet these three requirements, at minimum:
- Be at least one month behind on your loan or about to miss a payment
- Provide proof of significant financial hardship, such as long-term illness or disability, the death of an income-providing family member, a sudden hike in housing costs like property taxes, divorce or natural disaster
- Live in the home as your primary residence
- Conventional loan modification: If you have a conventional mortgage backed by Fannie Mae or Freddie Mac, you might be eligible for the Flex Modification program, which can reduce your monthly payments by up to 20 percent, extend the loan term up to 40 years and potentially lower the interest rate.
- FHA loan modification: There are a few options for an FHA loan modification, including an interest-free loan for up to 30 percent of your balance or a 40-year loan extension.
- VA loan modification: If you have a VA loan, you might be able to roll the missed payments back into the loan balance and work with your lender to come up with a new, more manageable repayment schedule. You can also request a 40-year extension to your loan term.
- USDA loan modification: With a USDA loan, you can modify your mortgage with an extended term of up to 40 years, reduce the interest rate and receive a “mortgage recovery advance,” a one-time payment to bring the loan current.
Loan Modification Secrets| Loan Modification Explained
FAQ
What is an example of a loan modification?
What qualifies for loan modification?
Why would someone do a loan modification?
What is the difference between a forbearance and a modification?
What can a loan modification DO FOR YOU?
A modification can help you lower the interest rate, extend the loan term, switch from a variable rate to a fixed rate, and move missed payments to the end of the loan term. Any one of these actions could lower your monthly payment amount and make it easier to repay.
What are the different types of mortgage loan modifications?
Common types of mortgage loan modifications include lengthening the loan term, lowering the interest rate, or switching from an adjustable to a fixed-rate mortgage. Here are the types of modifications available for the three most common types of mortgages:
What is a mortgage modification?
A modification typically changes the loan’s rate, term or both to make monthly payments more affordable. If you’re seeking to modify your mortgage, you must provide proof of hardship to your mortgage lender or servicer. Loan modifications are a long-term financial relief option for homeowners who can’t make their mortgage payments.
Can you get a mortgage loan modification?
But depending on the circumstances, you may be eligible for a loan modification, which can make it easier to stay on top of mortgage payments and avoid foreclosure. If you’re in this position, here’s what to know about getting a mortgage loan modification.