What is a mortgage modification & how to get one

If you start to fall behind on your mortgage payments, it could eventually lead to foreclosure. Depending on your financial circumstances, your lender may offer a mortgage modification plan. These plans could help you stay in your home by lowering your monthly payments. If you've been struggling to make your payments, or already missed a payment, a mortgage modification may help.

What is a mortgage modification?

A mortgage modification changes the terms of your original mortgage agreement. Your lender will work with you to try and find a way to lower your monthly payment by adjusting the terms of your current mortgage. The goal is to help you get back on track.

Lenders have several options when it comes to a mortgage loan modification. They'll work with you to find the best solution for your situation. You may want to talk to your lender about a mortgage modification if you:

• Are in danger of falling behind on your mortgage payments
• Have already missed a payment
• Aren't eligible to refinance your property
• Are facing long-term financial hardships that could make it difficult to repay your loan

How a mortgage modification can affect your loan

A mortgage modification alters your original loan. Before deciding on one, you should know how it could affect your loan.

• Extending the term of the loan. Some modifications may extend the length of your loan. For example, your 30-year mortgage may change to a 40-year mortgage. This gives you longer to repay the amount, so your payments would be lower, but you'll also pay more in interest over the life of your loan. You can use a mortgage calculator to see how a longer term might affect your payments and overall cost of the loan.
• Reducing your interest rate. If interest rates have dropped, you may be able to get a lower interest rate on your loan. Lowering the interest rate even a little can significantly reduce your monthly payment. The rate decrease may be temporary or fixed, so you'll want to check before agreeing to the modification so there are no surprises later on.
• Securing a fixed interest rate. Some homeowners have an initial fixed rate that switches to a variable interest rate a few years into their loan. Once their rate changes, their payments could fluctuate and end up costing them more than they can afford. The lender may be able to secure a fixed interest rate, making the payment amount more predictable and potentially less expensive.

How is a mortgage modification different from refinancing?

While modifications and most refinancing agreements share a goal of lowering your monthly payments, the two programs are very different. Refinancing is the process of securing a new mortgage. You’ll need to apply, qualify and close on a new mortgage loan, and you may choose to refinance with a new lender. Alternatively, a mortgage modification adjusts the mortgage agreement that's already in place with your current lender.

If you’re experiencing financial difficulties, refinancing may not be an option since you may not qualify for a new loan with the changes in your financial circumstances. A modification doesn’t require the same kind of application and approval as a refinance. That means it could be a better option if you have less-than-perfect credit or your income has decreased.

What to know before getting a mortgage modification

1. A mortgage loan modification will affect your credit

Be prepared for your credit score to go down when you apply for a mortgage modification. If you've already missed some payments, your credit score will also be negatively affected. Keep in mind, though, that the impact on your credit score from a mortgage loan modification will be less severe than the impact of a foreclosure. Foreclosures stay on your credit history for seven years. They can also automatically disqualify you from some future loan programs. This won't be the case with a mortgage modification.

The good news with a mortgage modification is that you'll be in a good position to rebuild your credit score. With a lower payment, you’ll have an opportunity to catch up on any missed mortgage payments. You may even have enough breathing room in your budget to catch up on other bills as well.

2. There may be other options to save your home

Mortgage modifications aren't the only option you have to prevent foreclosure. If your financial circumstances are temporary, then your lender may be able to offer you a mortgage forbearance. This is a temporary pause or reduction in payment amount instead of modifying the loan permanently. These programs are specifically for those who have only a temporary change in their circumstances but will be able to resume their regular repayments after a short period of time.

If you can restart your normal mortgage payments again after missing one or two, then you may be better off setting up a repayment plan with your lender. Instead of modifying your loan, your lender can increase your payment amount temporarily until you've made up the payments you missed. After that, your payments would go back to their regular amount.

Contacting your lender as soon as you know you aren't going to make a payment is best. This helps them find the right option for your circumstances.

3. You can still refinance later on

If you need a mortgage modification now, you may still be able to refinance later on. Refinancing can help you reduce the length of your loan, or help you secure a lower interest rate. However, refinancing depends on your income history and credit score. It's good to keep in mind that if your financial situation improves in the future, you aren't locked into the modified mortgage.

4. You may pay more in interest over the life of the loan

If you need a mortgage loan modification, you may end up paying more for your home over the life of your loan. For example, say your modification involves changing your loan from a 30-year mortgage to a 40-year mortgage. You'll end up paying an additional ten years’ worth of interest on the principal amount.

If you plan on selling, this might not matter as much. But if you’re hoping to pay off the house, this can have a big impact on your future financial plans.

5. You’ll need to qualify for the mortgage modification

A mortgage modification isn't automatic. You'll need to contact your lender and see if you’re eligible for their modification program. Then you'll need to apply and get approved for the modification. Your lender will review your income and expenses and talk with you to better understand why you need a modification.

You may need to have a qualifying life event to get the mortgage loan modification, which could include:

• Loss of a job
• Developing a long-term illness
• Death of a spouse

Talking to your lender will help you determine if you’re eligible for an adjustment and what you'll need to do to apply.

How to apply for a mortgage loan modification

• Gather your financial information. Your lender will need information on your income and expenses. They'll also need to know how those expenses have changed since you took out the loan and why you’re having difficulty making your payments.
• Contact your lender and explain the situation. Be prepared to have an open and honest discussion about your finances. When you explain your circumstances, your lender will discuss options that may help, including a mortgage modification. Don't try to hold back information. The more you can tell your lender, the better they’ll be able to help find the right solution for your needs.
• Fill out the paperwork for the mortgage modification. Most lenders will ask you to formally apply for the mortgage loan modification. Once approved for the modification, you'll start paying your new monthly mortgage amount right away. Make sure you carefully review the new terms so you know what to expect in the future.

A mortgage modification can help you and your family keep your home. The most important step is talking to your lender as soon as you know you may have difficulty making your mortgage payment. Being proactive can help prevent bigger issues like foreclosure.