What Happens If You’re Late on Payments After a Loan Modification?

Getting approved for a loan modification can provide critical relief if you’re struggling to make your monthly mortgage payments. But the process doesn’t end once your loan mod goes through. You still need to make the revised payments on time each month. Unfortunately, many borrowers end up defaulting again due to late payments even after getting a modification.

In this comprehensive guide, we’ll look at the implications of being late on payments after your mortgage loan has been modified, options for getting back on track, and how to avoid running into issues.

Overview of Loan Modifications

First, let’s quickly recap how loan modifications work. A loan modification is when the lender agrees to change the terms of your mortgage to make it more affordable. Common changes include:

• Lowering the interest rate
• Extending the repayment term
• Adding missed payments to the loan balance
• Reducing the principal balance

Lenders will look at your financial situation, including income, debts and hardships, to create a modified payment you can manage. Modifications can be done through the federal government’s Making Home Affordable programs, lender programs, or negotiations with the servicer.

The goal is to avoid foreclosure by making payments suitably affordable But it only works if you continue making the new modified payments on time

Consequences of Late Payments After a Modification

Most loan mods come with a trial period usually 3-6 months where you make the revised payments before the modification is finalized. If you’re late even once during the trial, the lender can deny making the mod permanent.

Once the modification goes through, continuing to miss or be late on the modified payments can still have severe consequences:

• Foreclosure restart – The lender can resume the foreclosure process that was halted during the modification

• Loan default – Being 60+ days late will lead to loan default. The lender can call the full mortgage balance due immediately.

• Credit damage – Late payments will be reported to the credit bureaus, damaging your credit scores.

• Modification termination – Being chronically late may cause the lender to terminate the modification and reinstate the original loan terms.

• Ineligibility – Defaulting after a mod may make you ineligible for additional mods in the future if you need help again.

As you can see, not keeping up with payments even after getting a modification can quickly put your home at risk. Just as with the original mortgage, you must make the revised payments on time each month.

Reasons for Post-Modification Default

There are a few common reasons borrowers have trouble staying current after a loan modification:

• Payment still unaffordable – For some, even the modified payment is still too high relative to income. The lender may not have reduced it enough.

• Income loss after modification – A job loss, reduced wages or other loss of income after the mod makes paying difficult.

• Poor budgeting – Not properly budgeting for the modified payment and other expenses leads to coming up short each month.

• Forgotten payments – Some borrowers simply forget or miss payments due to lack of proper tracking.

• Temporary hardship – Unforeseen expenses like medical bills or car repairs make it impossible to pay some months.

Identifying the root cause of why your modified payment is being missed is an important first step to getting back on track.

Options If You Default After a Loan Modification

Don’t panic if you’ve found yourself in default even after getting a loan mod. You may still have options to avoid foreclosure:

Reinstate the loan – Make up the missed modified payments to bring your mortgage current again. You’ll have to pay late fees too.

Request an additional modification – If affordability is still an issue, contact the lender to discuss a further modification. Provide updated financials.

Apply for loss mitigation – Ask the lender about alternative loss mitigation programs that may help you get back on track.

Sell or surrender the home – As a last resort if reinstatement isn’t possible, you may need to sell the home to avoid foreclosure.

The earlier you contact the lender to discuss your situation, the more options will be available to potentially save your home. Don’t wait until you’ve missed several payments.

Tips for Avoiding Post-Modification Default

Here are some tips to help you continue making payments on time after getting a mortgage modification:

• Review the new terms closely to understand the modified payment amount, due date, and any other changes.

• Set payment reminders and track them in a calendar to avoid forgetting and becoming late.

• Stick to a strict household budget that properly accounts for the revised mortgage payment and other living expenses.

• Build up emergency savings you can tap if an unforeseen expense makes paying difficult in a given month.

• Get budget counseling if you are still struggling even after the modification. The counselor can help identify ways to trim expenses.

• Communicate early with the lender if a financial hardship starts impacting your ability to pay again. Don’t wait until you’ve missed a payment.

• Contact credit counseling agencies like Money Management International if you need help managing debt, credit, and housing issues.

With proper planning, budgeting, and communication, you can successfully move forward with the loan modification and avoid jeopardizing your homeownership. Don’t let missed payments derail your modified mortgage.

How Late Payments After Modification Are Reported to Credit Bureaus

Any late mortgage payments you make will be reported to the three major credit bureaus – Equifax, Experian, and TransUnion. This can damage your credit score.

Most mortgage servicers will report a payment as late if it is 30 days past the due date. A payment that is 60 days late may be reported as delinquent.

These late payments will appear in the payment history section of your credit report and factor into your overall payment history, which makes up a significant portion of your credit score.

Even being only 30 days late can cause a severe hit to your credit scores – as much as 60-110 points, according to myFICO. Just a single late payment can drop a very good credit score of 780 down to a fair score of 670.

Now if the delinquency reaches 90-120 days late, that is severe enough for the servicer to report a derogatory status, like “loan modified” or “loan deferred.” This signals there is a serious issue with the mortgage.

The good news is that over time as you make consistent on-time payments, the damage from isolated late payments after modification will decrease as the best predictor of future behavior is your most recent behavior.

Sample Timeline of the Impact of Post-Modification Delinquency

To give you a sense of the typical timeline of events and credit reporting when payments become delinquent after a mortgage modification, here is a sample scenario:

• January: You complete a loan modification trial period and the modification is permanently approved lowering your monthly payment.

• February: Due to a job loss and savings being depleted, you are unable to make the February and March modified payments by their due dates.

• April: The servicer reports the February payment as 30 days late to the credit bureaus.

• May: The March payment is now 60 days late and reported as delinquent on your credit reports. Your credit score drops 100 points.

• June: You contact the servicer and apply for a COVID-related forbearance program. The forbearance is approved, allowing you to temporarily pause payments and avoid foreclosure. The servicer reports your mortgage as “loan modified” reflecting the forbearance.

• July: Once the forbearance ends and you are able to resume modified payments, you start consistently making them on time each month. Slowly over time, your credit score recovers as the late payments have less of an impact.

This example illustrates how quickly just 1-2 missed payments can tank your credit scores. It also shows how utilizing relief programs can help you get back on track.

Alternatives if You’re Struggling With Payments After Modification

Sometimes even with reduced payments, homeowners still struggle after a modification. If this fits your situation, don’t lose hope. You may qualify for alternative assistance programs:

Deferment or forbearance – Temporary payment pause (up to 180 days) due to financial hardship. May still require lump sum or modified repayments later.

Partial claim – Interest-free loan from the lender to cover missed mortgage payments. Repaid when home is sold/refinanced.

FHA-HAMP – Provides a second modification for FHA loans, further reducing payments.

VA loan refund – VA can refund lender up to 30% of loan balance to help reinstate or modify VA loans.

Recasting/re-amortization – Recasts remaining mortgage balance to start fresh with a new lower monthly payment.

Principal reduction – Permanently lowers principal to align with current home value. Lowers monthly payment.

Don’t struggle alone if you’ve had trouble with payments after a mortgage modification.