If you’re like most people, you’ll never make a bigger financial commitment in life than getting a mortgage to buy a home. In a perfect world, you would easily repay your loan on time, and own your home free and clear after 15 or 30 years. But life rarely goes as planned.

Loss of work, illness, injuries, or natural disasters could cause serious financial problems that leave you struggling to pay your mortgage. Should you encounter such problems and remain committed to keeping your home, consider talking to your lender about mortgage modification.

What Is a Loan Modification?

Loan modification is the process of taking an existing mortgage and adjusting its terms. This can mean extending the term of the loan, reducing the interest rate, or forbearing a portion of the loan’s payments for a time.

The result of mortgage modification usually is a lower monthly payment. This makes it easier for the borrower to keep paying their loan and avoid foreclosure. Lenders benefit from loan modification because foreclosures are typically more expensive than loan modifications.

Loan modifications have helped thousands of homeowners keep their homes. The Mortgage Bankers Association estimates that the number of loans in forbearance fell from 705,000 in December 2021 to 590,000 in February 2022, and roughly 15% of the homes that have left forbearance since June 2020 did so with a loan modification.

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When To Consider Mortgage Loan Modification

Loan modification is meant to help borrowers who have encountered financial difficulties that prevent them from paying their mortgage. These are borrowers who want to keep their home and are committed to repaying the loan as best they can — but they need some help. They may be underwater on their mortgage, are ineligible for or unable to afford refinancing, and are unlikely to avoid foreclosure without assistance.

Loan modification vs. refinancing

Loan modification involves changing the terms of an existing mortgage. Refinancing means taking out a new loan to replace the original one. The new loan can have different terms, such as a lower or higher payment and a shorter or longer payoff period.

Getting that new loan requires going through underwriting again. If you’re having trouble making your payments now, it may be difficult to qualify for a new loan with terms that will be easier to repay than your current mortgage.

If you don’t qualify for a refinance or the loan you’re offered fails to lower your payment enough for you to afford it, loan modification could be the better choice.

Loan modification vs. forbearance

Loan modification permanently adjusts the mortgage, whereas forbearance is a more temporary solution for someone facing financial hardship.

If you enter forbearance, your lender will let you stop making your monthly mortgage payment temporarily. This gives you an opportunity to recover from a financial setback. However, keep in mind that interest still will accrue during the forbearance period.

Typical forbearance periods are three to six months, but they can be extended up to a year or longer in some instances.

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How Does a Loan Modification Work?

Modifying your home loan typically requires you to reach out to your lender and provide a good reason for needing to do so, such as documentable financial hardship.

Keep in mind that while modifying your loan could help you avoid foreclosure, it will have a negative impact on your credit.

If you still want to know more, there are a few ways lenders can modify your loan to help reduce the monthly payment.

Lower your interest rate

Lowering the interest rate on your loan reduces the amount of interest that accrues each month. Because each monthly payment includes the full amount of interest that accrued in the previous month, plus some principal, this reduces your monthly payment.

When lenders lower your interest rate, they often will recoup the money you would have paid under the original rate by raising the rate on your loan down the line. This typically will happen every five years until the loan is paid off.

Extend your loan’s term

Extending the term of your loan means reducing the amount of principal you pay each month and adding payments at the end of the original repayment period to compensate. For example, you could extend a 30-year mortgage to a 40-year mortgage by adding 120 payments to the schedule and recalculating the monthly amount due. You’ll pay less each month, but the overall cost of the loan will increase because there’s more time for interest to accrue.

Reduce your principal balance

This is a rare form of mortgage modification where the lender reduces your loan’s balance — essentially giving you money by writing off part of your debt. If this happens, make sure to speak to a tax professional, as this forgiven debt may count as taxable income.

Change your interest rate type

There are two common types of interest rates: adjustable and fixed. With an adjustable-rate mortgage, the interest rate on your loan changes over time.

Some borrowers have trouble making payments when they increase. Lenders can choose to convert your ARM to a fixed-rate mortgage, which locks in your interest rate and your payments — protecting you from potential increases.

Add late fees to the principal

If you’ve missed payments or made late payments, the lender can charge late fees. And if you’re unable to afford those fees, the lender may add them to the principal. This will increase the amount of interest that accrues on the mortgage, but lets you spread the payment of the late fees over the life of the loan.

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Applying For Mortgage Loan Modification

If you think that a loan modification could help you, the first thing to do is contact your lender. Each lender will have its own process for getting a loan modification, though you can expect some similarities.

One thing that will help your application with almost any lender is putting together a budget that shows you’re serious about getting your financial situation under control and proves you can afford the modified payment, says Angela Blakenship, CEO of Best Neighborhood, a Seattle-based real estate website that helps people find communities.

“Make a list of your monthly payments for groceries, utilities, child care, medical expenditures, loans and credit cards, auto payments, insurance, school loans, and so on, as precisely as possible,” she says.

Mortgage loan modification requirements

Each lender has different requirements to qualify for a loan modification, but typically you must:

  • Be at least one payment behind on your loan, or be able to show missing a payment is imminent.
  • Document your financial difficulties and show that they aren’t short term. For example, show that you’re facing financial trouble due to a long-term disability, not a one-time auto repair bill.

Many banks list requirements on their website. For example, Chase requires that borrowers:

  • Have a loan that isn’t owned or insured by a government agency.
  • Own a one- to four-unit property.
  • Have a payment that’s too high due to financial hardship.
  • Have a home in livable condition.

Bank of America has similar requirements, but adds that borrowers must have made at least six full payments.

Documenting your need for a loan modification

With almost all lenders, the first step to qualifying for mortgage modification is documenting your need for financial help.

Expect to provide the following information, with supporting documentation:

  • Proof of income:
    • Pay stubs.
  • Proof of expenses:
    • Monthly utility bills.
    • Monthly loan bills.
    • Bank statements.
  • Proof of assets:
    • Bank statements.
    • Investment account statements.
  • Recent tax returns.

You’ll also want to explain why you’re experiencing hardship and show proof. For example, you could provide a note from a doctor describing a new injury or disability, or documentation on the death of a spouse.

Help with modifying a loan

Dealing with lenders can be stressful and difficult, especially if you’re already facing financial hardship. If you need help modifying your loan, there are resources available.

Do you need an attorney?

You don’t need to work with an attorney to get a loan modification. You can reach out to your lender directly to discuss loan modification options and to request one.

However, that doesn’t mean you can’t get help with the process. If you have an attorney or someone you trust to assist you, they could help you work with your lender to modify your loan.

Other assistance programs

There are many local and state-based programs for getting help with modifying your loan. For example, Massachusetts’ attorney general has a phone line that offers help to borrowers who are having trouble working with their lender.

There also are assistance programs. For example, the Coronavirus Aid, Relief, and Economic Security Act helps borrowers with federally backed loans get up to one year of forbearance.


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Modifying Government-Backed Mortgages

The U.S. government offers many programs to help people buy a home, such as the Federal Housing Administration loan program. Such programs have specific rules and regulations, which means modifying them can be more complex.

FHA programs

The agency has multiple programs that can assist homeowners with FHA loans. These programs include:

  • Forbearance.
  • Unemployment forbearance.
  • Pre-foreclosure sale.
  • Deed in lieu of foreclosure.
  • FHA Home Affordable Modification Program.

Under HAMP, borrowers can modify their mortgages in a few ways, such as placing unpaid balances in a second, zero-interest loan; deferring principal payments; adding unpaid balances back to the loan’s principal; or extending the term of the loan.

VA programs

The Veterans Affairs loan program has multiple options for borrowers looking to avoid foreclosure. Its loan modification process allows borrowers to add missed payments back to the principal and to work out a new payment schedule that works for their budget. Loans can be extended by a minimum of 10 years and as many as 30 years.

USDA programs

The U.S. Department of Agriculture loan program lets borrowers modify their mortgages to avoid foreclosure. This is the most popular way for distressed borrowers with USDA loans to get help and avoid losing their homes.

To qualify for a loan modification on a USDA loan, the borrower must:

  • Be at least three months late on payments.
  • Not be in foreclosure.
  • Be able to prove the loss of income or increase in living expenses that led to the default.
  • Be able to afford the payment on the modified loan.

The lender can only modify loans to have a fixed interest rate lower than the original rate. The modification also must make the loan current and bring it out of default.

Flex modifications

Flex modifications let homeowners with loans insured by Freddie Mac and Fannie Mae extend their loan terms up to a total of 40 years.

To qualify, borrowers must:

  • Complete paperwork known as a “borrower response package.”
  • Be 60 days delinquent or be in a state of imminent default if they occupy the home.
  • Have an eligible hardship, such as unemployment, reduced income, disaster, or disability.
  • Have verified, stable income that is sufficient to make the new payment.
  • Have had the mortgage for at least one year.

Eligible borrowers must complete a three-month trial before the modification becomes permanent.

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Pros and Cons of Mortgage Loan Modification

Mortgage modification is one option for keeping your home and avoiding foreclosure, but there are drawbacks.

Pros of mortgage loan modification

  • Avoid foreclosure and keep your home.
  • Lower your monthly mortgage payment.
  • Unlike when borrowers refinance, you don’t need good credit to modify a loan.

Cons of mortgage loan modification

  • Loan modification can damage your credit.
  • The overall cost of your mortgage will increase.
  • It may take longer to pay off your loan.

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How Long Does It Take To Modify a Loan?

It can take some time to go through the loan modification process. Once you reach out to your lender, you’ll likely have a dialogue where you discuss your hardship and the documentation you must provide.

Once the lender has all the required information, it also needs time to review your documents and determine the best way to help you resume making payments. How much time the lender needs can vary. Bank of America, for example, says it can take as long as 30 days to decide.

If your lender approves the modification, you may have to go through a trial period where you start making the new payment. Missing payments during this period can result in the lender ultimately denying the modification.

Overall, expect a loan modification to take between one and three months, though it can take as long as nine months in some instances.

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If Your Lender Refuses To Modify Your Loan

Even if you ask your lender for help and submit all the required documents, there’s no guarantee that the lender will agree to modify your loan.

If your application is denied, you can submit an appeal within 14 days of the denial. If you do this, the loan servicer will assign someone to review your appeal and respond within 30 days.

If your appeal also is denied, you still may have options. For example, you might qualify for deferment under a program such as the CARES Act.

Erik Wright, owner of New Horizon Home Buyers, a real estate company based in Chattanooga, Tennessee, suggests homeowners bolster their appeal by researching statistics on the local real estate market and quality-of-life factors, such as job growth.

“Having conditions favorable for a house growing in value will make mortgage modification more likely,” he says.

In the worst case, you’ll have to start thinking about alternatives that involve giving up your home. This can mean letting the bank foreclose, trying to sell your home, or filing for bankruptcy.


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The Bottom Line on Mortgage Loan Modification

Loan modification could be an option for people who own a home but are now having trouble making payments. By adjusting the terms of your existing mortgage, it offers a way to avoid foreclosure and keep your home. While the loan modification process isn’t easy, it could save you from the heartache of losing your dream home.