Mortgage Loan Modifications
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What is a mortgage loan modification?
A mortgage loan modification is a change in an existing mortgage loan to make it more affordable to a homeowner at risk of foreclosure. Loan modifications usually result in lower monthly mortgage payments.
Mortgage lenders often agree to modify a loan when they will lose less money modifying the loan than by foreclosing on the house. The lender looks for the lowest-cost solution. Even though loan modifications help the homeowner, the benefits to the homeowner do not usually affect the decision of the lender.
Instead of modifying the mortgage, lenders sometimes agree to delay a foreclosure for a period of time, temporarily reduce or suspend payments, or set up a repayment plan for missed payments.
What are the benefits of loan modifications?
Mortgage loan modifications change the terms of your mortgage to make your payments more affordable. Lenders modify loans to prevent costly foreclosures. Homeowners benefit by getting to keep their houses.
Each bank or mortgage lender decides on eligibility rules and benefits for their loan modification programs. Sometimes lenders negotiate on a case by case basis.
Common mortgage loan modifications are:
- Decreasing the mortgage interest rate: A decrease in the mortgage interest rate lowers your monthly payments. The decrease can be temporary or permanent.
- Forgiving part of the loan amount: The lender agrees to lower the total amount you owe on the loan, which reduces your monthly payments.
- Deferring part of the loan amount, interest-free: The lender postpones payments on part of the principal for a period of time, and calculates your mortgage payments based on the remaining principal. This lowers your monthly payments temporarily.
- Giving you more time to pay off the loan: If you have a 30-year mortgage, the lender may extend it to 40 years. This lowers the monthly payments because you are paying off your loan for a longer period of time.
Lenders may also offer:
- Foreclosure delay or moratorium: The lender delays the foreclosure sale to give you more time to work out a solution.
- Forbearance: The lender allows you to stop or reduce your mortgage payments for a period of time.
- Repayment plan: The lender gives you extra time to repay missed payments, usually by adding a portion of the debt to each regular monthly payment until you are caught up.
Can I delay a foreclosure while I work out a solution?
Lenders are often willing to delay a foreclosure to give you more time to find a solution. Lenders may delay foreclosures on a case-by-case basis, or may announce a foreclosure moratorium that applies to an entire group of borrowers.
How can I get loan modifications?
If you are in trouble with your loan, you should contact your lender or mortgage servicer to discuss your options. Your lender usually won't offer a loan modification or other solution unless you ask for it. If you get a default or foreclosure notice from your lender, don't ignore it. Call your lender and see if they are willing to help you.
The amount of equity you have in the house may affect your lender's willingness to modify your loan. Equity is the difference between the fair market value of your house and the amount you owe.
If you have little equity and your lender would lose money at foreclosure, your lender is more likely to modify your loan. If you have enough equity in the house so that a foreclosure sale will cover the loan amount plus fees, your lender is less likely to modify your loan. Your lender will usually choose the lowest cost solution.
Who owns your loan also affects your ability to get a modification. Some mortgage loans are held by one lender such as a bank. Other mortgage loans are split up and sold to investors. It is easier to get a loan modification if your loan is held by one owner. Many of the major U.S. banks have mortage modification programs.
For most loan modifications, lenders require that you:
- live in your house as your principal residence
- have steady income
- show that you will be able to afford the lower payments
There may also be additional requirements. If your lender refuses to modify your loan, you should call a foreclosure counseling program to see if they can help.
What is the Home Affordable Modification Program (HAMP)?
The Home Affordable Modification Program (HAMP) is a new U.S. government program to help homeowners who cannot afford their monthly mortgage payments because of financial hardship. Under the program, mortgage providers lower interest rates or take other steps to make loans affordable. Homeowners pay no more than 31% of their monthly household income for their modified loan payments. Costs are shared by the mortgage providers and the federal government.
HAMP is part of the Making Home Affordable refinance and loan modification program designed to help struggling homeowners keep their homes. It is a temporary program to bring stability to the housing market during the current financial crisis.
The Home Affordable Modification Program replaced the Streamlined Modification Program (SMP) on March 4, 2009. Under the SMP, modified mortgage payments were no more than 38% of the household's monthly gross income.
For details about the Home Affordable Modification Program, including eligibility, benefits, and how to apply, see Making Home Affordable Refinance and Loan Modification Program.
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