Financial difficulties can hit homeowners at any time, making it challenging to keep up with their loan payments. Whether it's job loss, illness or divorce – if you're struggling to pay your mortgage, a loan modification may be your best solution.
If you qualify and can handle the new terms that come with a mortgage modification, you can avoid foreclosure on your home. Ideally, a mortgage loan modification allows you to keep your home and gain a more solid financial footing.
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A loan modification refers to permanently changing the terms of your existing mortgage loan rather than replacing it with a new one as you would if you were to refinance it. If your mortgage payments are higher than you can afford, you can apply with your lender for a mortgage modification that will lower your payments to an amount you can handle. In some cases, a loan modification will require a trial period of several months before it becomes permanent.
Your lender will review your situation to determine what type of loan modification terms are most likely to help you manage your mortgage payments. Some options include:
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Lower the mortgage principal and interest rate portions of your monthly payments.
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Extend the repayment term to reduce your monthly payment, sometimes to a 40 year loan.
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Add past due amounts to the principal balance and recalculate your monthly payment to bring your loan up to date.
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Forgive some of the balance to lower your monthly payment.
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Change the term of the loan from an interest only or adjustable rate mortgage to a fixed rate mortgage to stabilize your payments.
Learn more: Adjustable rate versus fixed rate mortgages
Loan modification requirements vary by loan program and lender, but in general, you need to meet two conditions. First, you must be able to show a reason for your hardship, such as loss of income or unexpected expenses due to a death in the home, natural disaster, job loss, divorce, or some other circumstance that affects your ability to do so. make your current mortgage payments.
Second, you must demonstrate that you can afford to make modified mortgage payments. Similar to applying for a new loan, your mortgage lender will want to review your financial statements, income, assets and credit.
Read more: 6 options for handling your mortgage when getting a divorce
If you find yourself in financial trouble and unable to pay your next mortgage payment or have fallen behind on your payments, the first step is to call your lender. Depending on your circumstances, your lender should discuss several options with you, possibly including a loan modification.
You can also contact a HUD approved housing counselor in your area who can help you understand your options, given your personal financial situation.
If a loan modification is an option, you will need documentation to apply, including:
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Evidence of the cause of your hardship such as a death certificate or information about a natural disaster that changed your financial situation.
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Financial paperwork showing your reduced salary or increased expenses.
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Recent statements from your bank and investment accounts.
Loan modification options vary by loan program and lender, so it's best to start by contacting your mortgage servicer if you have financial problems. Loan modifications are generally available through the following loan programs:
Conventional loans owned by Fannie Mae and Freddie Mac
The Flex Modification program is available for primary residences and second homes or investment homes with loans owned or partially owned by Fannie Mae or Freddie Mac. The Flex Adjustment payment must be lower than the current payment, preferably 20%, and borrowers must prove their hardship and stable, verifiable income.
The home owner should have had the loan for at least 12 months. Borrowers must be delinquent for at least 60 days, or if at least one borrower lives in the home, the loan must be in default soon even if the payments are current.
Until April 30, 2025, borrowers with an FHA loan that is 61 days or more delinquent have multiple options under the COVID-19 recovery program. Borrowers who can achieve a 25% reduction in their monthly principal and interest payments may be eligible.
Other programs are available to FHA borrowers to reduce payments and finance delinquencies. In 2025, the FHA is projected to return to its previous loan modification program, which includes three options. First, you can lower your payments and add past due amounts to the balance while extending the loan term. Second, you can choose a partial claim which adds a zero interest lien on the property to cover past due amounts. Thirdly, you can choose a combination of the two programs.
VA borrowers who are having trouble making payments can request a loan modification, which may include extending their loan term, reducing the interest rate, or including past due loan amounts in their loan with a new repayment schedule.
Borrowers with a USDA loan in imminent danger of default may be eligible for a loan term extension of up to 40 years or a lower interest rate.
Read more: How a 40 year mortgage loan works
Although a loan modification can be a way to save your house from foreclosure, this solution to financial difficulties has some advantages and disadvantages.
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You can still own your home as loan modifications are permanent changes.
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You may be able to refinance in the future to more favorable terms.
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Lower payments could help you recover financially from a crisis.
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You may pay less interest if the rate is lowered without extending the term of your loan.
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A loan modification usually does not require closing costs, while a refinance does.
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Your credit score could drop depending on how your loan modification is reported (but not as severely as if you were facing foreclosure).
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Missed payments and late payments before your loan modification will remain on your credit report.
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If your loan term is extended, it will take longer to pay off your loan in full, and you will likely pay more interest over time.
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If the payments aren't low enough to help you get back on your feet, or if your financial situation doesn't improve, you can still lose your home in foreclosure.
Dig deeper: What to expect when facing foreclosure
If you are struggling to pay your mortgage, there are other options available besides a loan modification, including:
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Abstain. Mortgage foreclosure is a temporary solution for struggling homeowners. Your lender may allow you to delay or reduce your monthly payments for a certain amount of time. However, you will eventually need to make the deferred payments, which could result in a large lump sum being due at one point.
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Refinancing. If you have good or excellent credit and enough equity in your home, you may be eligible to refinance your mortgage into a new loan with lower payments. However, refinancing may not always lower your payments, especially if mortgage rates are higher now than when you took out your current loan. You will also need sufficient income to qualify for the new payments. In addition, refinancing requires you to pay closing costs.
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Short sale. Consider a short sale if you owe more on your home than its current value. Your lender will have to agree to pay off your mortgage with the proceeds from the sale of your home, even if the amount does not cover the full amount. In some states, your lender could sue you for the difference if they haven't signed a waiver releasing you from the debt.
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Deed-in-lieu foreclosure. If you can't afford modified payments on your mortgage, you may want to ask your lender to accept a deed in lieu of foreclosure, sometimes also called “cash for keys.” In this case, you would give up your home but avoid the foreclosure process, saving you time and money.
Learn more: How a short sale in real estate works
If you cannot provide evidence of financial hardship that causes you to struggle to afford your monthly mortgage payments, you may not be eligible for a mortgage modification. In addition, you may not be eligible if you cannot provide confirmation that you have sufficient income to make adjusted payments.
A loan modification can lower your credit score – but usually, when you apply for a mortgage modification, you've already missed one or more loan payments. Missed, partial or late payments will probably have already damaged your credit. A loan modification is likely to be less damaging than a foreclosure on your credit score.
You are not required to hire a lawyer for a mortgage loan modification, but you may want to consider doing so if you are unsure about the terms of the modification. Alternatively, you can contact a HUD-approved housing counselor for professional advice.
This article was edited by Laura Grace Tarpley.