How to Get a Mortgage Loan Modification

If you're struggling to pay your mortgage, you might be able to lower your payments with a loan modification.

By , Attorney (University of Denver Sturm College of Law)

If you're facing challenges paying your mortgage, you should understand how loan modifications work and whether a loan modification might be a good option.

A "loan modification" is a written agreement that permanently changes the promissory note's original terms to make the borrower's mortgage payments more affordable. A modification typically lowers the interest rate and extends the loan's term to reduce the monthly payment amount.

You'll need to contact your loan servicer to get a modification. Typically, you'll have to supply details about your income, expenses, and situation. You'll also usually have to provide supporting documentation.

Even though the process might seem intimidating, most people can apply for and, if they meet investor-specific guidelines, get a modification without paying for assistance.

What Is Loss Mitigation?

"Loss mitigation" is the process where borrowers and their servicer (on behalf of the loan owner or "investor") work together to prevent a foreclosure. The various loss mitigation options include loan modifications, forbearance agreements, repayment plans, short sales, and deeds in lieu of foreclosure.

The most sought-after form of loss mitigation is a loan modification.

What Is a Loan Modification and Why Consider It?

A modification usually lowers the interest rate and extends the loan's term (say, from 30 to 40 years) to reduce your monthly payments. In some cases, if you're behind in payments, you might be able to add the overdue amount to the loan balance as part of a modification.

With a loan modification, the borrower typically receives a lower monthly payment amount.

Common Reasons Homeowners Seek Loan Modifications

Homeowners seek loan modifications for various reasons, usually because of a financial hardship, such as a reduction in income, or a change in circumstances, like a death in the family, making it difficult to pay their monthly mortgage payments. In these and other similar circumstances, homeowners often seek loan modifications as a way to make their monthly payments more manageable.

Also, many homeowners apply for loan modifications when they're facing an imminent risk of foreclosure. If you're facing a foreclosure and get a modification you can afford, you can keep your home.

Who Might Benefit From a Loan Modification?

If you're currently unable to afford your mortgage payment due to a change in circumstances, but you could make a lower (modified) payment going forward, you're probably a good candidate for a loan modification.

For example, say you had to take a lower-paying job, but you have a steady income. Getting a mortgage modification might help you more easily afford your monthly mortgage payments and avoid a foreclosure.

Exploring Available Loan Modification Programs and Eligibility

The kind of modification you can get depends on your mortgage type and circumstances.

Government Modification Programs

You might qualify for a government modification program. Different options are available for borrowers with FHA-insured, VA-guaranteed, and USDA mortgages.

Modifications for Fannie Mae and Freddie Mac Mortgages

You might qualify for a Fannie Mae or Freddie Mac Flex Modification if you have one of those kinds of loans. To find out if either Fannie Mae or Freddie Mac owns your loan, call your mortgage servicer or use the Fannie Mae and Freddie Mac online loan lookup tools.

Proprietary Mortgages

Investors are also free to offer their own in-house modification options, called "proprietary" modifications.

Again, which program you might be eligible for depends on your loan type, whether you meet eligibility criteria, and your financial situation.

Do I Qualify for a Loan Modification?

To be eligible for a mortgage modification, along with meeting other investor-specific guidelines, you'll generally need to show that:

  • the home is your primary residence
  • you've gone through a financial hardship, like you had to take a lower-paying job or you went through a divorce and experienced a loss of household income, and
  • that you have enough steady income to make regular payments under a modification.

As part of the analysis, the servicer sometimes looks at your debt-to-income (DTI) ratio. The servicer might deny your modification request if your current DTI ratio is too high. A lower DTI ratio typically indicates that you'll be able to continue making your mortgage payments, making you a less risky borrower.

Understanding the Debt-to-Income (DTI) Ratio

Again, if you're applying for a loan modification, your debt-to-income ratio could be a factor.

Calculating Your Front-End DTI

A borrower's front-end DTI ratio is the percentage of gross (before taxes) monthly income that goes towards a mortgage payment. To determine your front-end DTI ratio, divide your total housing payment, including principal, interest, taxes, insurance, and homeowners' association fees, by your gross monthly income.

Example. Let's say Taylor's gross monthly income is $5,000 per month. His mortgage payment is $1,500 per month, property taxes are $400 per month, and insurance is $200 each month. Taylor's total monthly housing expense is $2,100. His front-end DTI ratio is 42% ($2,100 divided by $5,000).

If you apply for a modification and the servicer denies your request because your front-end DTI ratio is too high, this means the servicer believes you have too many expenses and too little income to make payments even if you got a modification. But if your DTI ratio isn't too high (and you otherwise qualify for a modification), the servicer will usually take steps to reduce your payment so that your DTI ratio will meet the guidelines for a specific modification program.

Calculating Your Back-End DTI

A back-end DTI ratio is the ratio of all your expenses divided by your gross monthly income. For example, if your expenses are $4,000 per month and your monthly income equals $12,000, your DTI is $4,000 ÷ $12,000, or 33%. Lenders also sometimes consider your back-end DTI ratio as part of the loan modification process.

Different Modification Programs Have Different DTI Requirements

Investors set specific DTI guidelines for their loan modification programs. To lower a borrower's monthly payment as part of a modification and get to an acceptable DTI ratio, the servicer will typically take the following steps:

  • lower the interest rate
  • extend the term (length) of the loan
  • capitalize the overdue amounts, and/or
  • forbear some of the principal. (See "How Modifications Usually Work" below for more on each of these steps.)

For some modification programs, the front-end DTI ratio can't be more than a specific amount, like 31%. In such a scenario, the modified house payment couldn't be more than 31% of the borrower's gross monthly income.

Example. Say your current mortgage payment is $2,500. If your gross monthly income is around $4,839, a modification would have to lower your payment to $1,500 to be at a 31% DTI ratio.

DTI ratio requirements vary by investor and program. Most modification programs allow a DTI ratio between 25% and 42%, although this isn't set in stone. Depending on the modification type and your circumstances, the investor might have flexible DTI requirements or not consider the DTI ratio.

Why Understanding Your Debt-to-Income Ratio Matters

Your DTI ratio is a key indicator of your financial health and your ability to manage your debt obligations. Lenders are more likely to consider and approve modifications for borrowers with a lower DTI ratio, as it suggests a greater capacity to handle modified repayment terms.

By understanding your DTI ratio, you get insight into how lenders view your financial stability. That way, you can proactively address any issues and present a stronger case for a loan modification. You might reduce your non-essential expenses or find a way to increase your income. These steps may improve your chances of getting approved for a loan modification.

How Modifications Usually Work

Here are some steps your servicer might take to modify your mortgage to reduce your payments.

Lower the Interest Rate

The servicer might reduce your mortgage's interest rate to the current market rate (or lower) if it's under what you're supposed to be paying now. Or the servicer might convert the loan from a variable rate to a fixed rate, which could bring the payment down if the interest rate has already reset, or prevent a jump in payments if a reset is about to happen.

Extending the Loan's Repayment Period

The servicer might extend the loan's repayment period from 30 years to 40, for example, which will bring down the monthly payment.

Capitalizing the Overdue Amounts and Reamortize the Loan

This process involves adding the amount of the missed payments to the principal balance and, usually, issuing a new interest rate for a new period. Reamortization can result in an increased payment (for example, if the interest rate stays the same or increases) or a reduced one (for example, if the interest rate is reduced and the loan period is increased).

Principal Forbearance

"Forbearing" the principal sets aside a portion of the total debt before calculating the borrower's monthly payment. This amount doesn't accrue interest and is due in a balloon payment when refinancing or selling the home or when the loan matures.

Principal Reductions Usually Aren't Available

However, lenders and investors usually won't approve a principal reduction as part of a first-mortgage modification, even if your home is underwater.

And, in most cases, you'll have to complete a trial period plan, often for around three months, to demonstrate you can afford the new modified amount.

How to Apply for a Loan Modification

Here's a step-by-step guide to navigating the loan modification process.

Initiating Contact: Reaching Out to Your Mortgage Servicer

To apply for a modification, contact your servicer's loss mitigation department, sometimes called a "home retention" department, and ask for a loss mitigation application. You can find contact information on your monthly mortgage statement or the servicer's webpage. (In some cases, your loan servicer might even contact you about a potential modification if you're delinquent in mortgage payments.)

Gathering Essential Documents for Your Loan Modification Application

You'll need to submit the application to your servicer, and likely include the following:

  • a completed questionnaire that includes your personal information, mortgage information, property information, and so forth
  • recent pay stubs or a profit and loss statement if self-employed
  • bank statements
  • tax returns
  • an income and expense financial worksheet, and
  • a hardship statement or affidavit.

Depending on the situation, you might also have to provide additional documentation or answer questions from the servicer.

However, in some cases, the servicer will approve you for a modification without having you submit a full application.

Awaiting the Servicer's Decision

After you apply for a loan modification, be sure to keep all correspondence you get from the servicer, such as a confirmation letter that the servicer received your complete application or a letter telling you that certain items are missing. This information could be useful if you want to challenge a foreclosure by showing the servicer didn't comply with servicing laws.

Understanding Possible Outcomes and Next Steps

In most cases, the servicer has to evaluate your application for a loan modification (and other loss mitigation options) within 30 days of receiving the application, as long as you submit a complete application more than 37 days before a foreclosure sale.

The servicer might offer you a modification or deny your request. Or it might offer you another alternative, like a short sale or deed in lieu of foreclosure.

You generally get 14 days to appeal a loan modification denial as long as the servicer received the complete loss mitigation application 90 or more days before a scheduled foreclosure sale. If the servicer receives your complete loss mitigation application less than 90 days before a foreclosure sale but more than 37 days before a foreclosure sale, the servicer must give you at least 7 days to accept or reject a loss mitigation offer.

Weighing the Options (Potential Drawbacks and Considerations)

If you get approved for a modification, before agreeing to it, ask yourself whether you'd be better off keeping your house or giving the property up. If you can get a lower mortgage payment, you might be more inclined to agree to the modification.

But you'll probably have to pay more interest over the life of the loan, and you might have to make payments for longer than you planned. Beware of modifications with very long terms, like 50 or 60 years. That's a long time to be paying off a mortgage. Also, be on the lookout for conditions that aren't so favorable, like a balloon payment for a considerable amount after just a few months or years.

So, the decision to proceed with a modification depends on many factors, including the size of the payment reduction and whether you truly can afford the modified payment. If you default in payments, you could find yourself in foreclosure.

Depending on the circumstances, it might make more sense to let a foreclosure go ahead. You can live in the house (payment-free) during the process and save money to find new living quarters. Getting out from under an unaffordable mortgage and finding a cheaper place to live could make more financial sense, especially if agreeing to the modification merely delays a foreclosure rather than prevents it.

Impact of a Loan Modification on Your Credit

A loan modification's impact on your credit rating mainly depends on how the lender reports the modification to the credit reporting bureaus. But any impact a modification has will still be better than that of a short sale, deed in lieu of foreclosure, or foreclosure. And, if you make timely payments under the modification, your credit will improve.

Should I Stop Paying My Mortgage to Get a Loan Modification?

During the foreclosure crisis, it was common for mortgage servicers to recommend to borrowers that they fall behind in payments to get a mortgage modification even if they could afford to make the payments.

While it's true that, in the past, lenders would only consider giving homeowners a modification if they defaulted on their loan, this is no longer the case.

Getting a Mortgage Modification While You're Current on Payments

To qualify for most modification programs, you can either be in default or show that you're in danger of falling behind, called "imminent default." But you don't have to actually go into default to qualify.

To qualify for a Flex Modification, for example, you can be behind in payments or show that you're likely to fall behind (and meet other eligibility criteria).

Downsides to Deliberately Falling Behind on Mortgage Payments to Get a Loan Modification

If you deliberately default on your mortgage payments, you might face some negative consequences.

Your credit scores will drop. After you miss a payment or multiple payments, your credit scores will fall. Once your scores fall, it can be difficult to refinance your mortgage, obtain a car loan, or get new credit cards. Even if you subsequently get a mortgage modification, you'll still have negative marks in your credit files.

Past-due amounts add up fast. If you start skipping payments just to try to get a mortgage modification, keep in mind you'll still owe the amounts you don't pay, plus interest and fees. These amounts can add up quickly. Also, once you fall behind, the lender can charge late fees, inspection fees, and various other charges associated with the delinquency.

The more payments you miss, the more fees and interest will accrue. Being far behind in payments can make it significantly harder to catch up if the lender denies your modification request. Ultimately, it could even lead to a foreclosure.

Don't Hire a Loan Modification Company to Help You

While it's sometimes useful to hire an attorney to help you in the modification process, you should avoid loan modification companies in almost all circumstances. Here's why.

You'll Save Money, Probably Lots, By Avoiding Loan Modification Companies

Loan modification companies charge a lot for services you can perform yourself. Modification companies collect your application paperwork from you and send it to your mortgage servicer. These companies charge thousands of dollars to act as a middleman.

It's much cheaper to handle the modification process yourself instead of paying someone else to do the legwork for you. Also, many modification companies are scammers who will do little or nothing to help you in the process.

Efficiency in Responding to Servicer Inquiries and Working Through the Process

If you handle the modification application process yourself, you can promptly respond to any inquiries or requests from the servicer. Loan modification companies often fail to respond to requests from servicers, or they only respond after many weeks or months pass, leading to modification denials.

Also, you're in the best position to deal with any inquiries or requests for additional documentation. Only you know all of your particular situation's details and have access to the paperwork that the servicer might want.

Loan Modification Scams Abound

The vast majority of modification companies are scammers. They'll take your money, and you'll get very little in return—certainly, nothing that you couldn't have done yourself.

These companies might tell you they're experts at negotiating a modification, but there's really no trick to it. Little to no haggling happens in the loan modification process. The investor has specific requirements that borrowers must meet to get a modification, and if you meet them, you'll get one.

Finding Support and Resources

The consumer section of the National Consumer Law Center (NCLC) website has helpful information on foreclosures and loan modifications.

To learn more about why your DTI is important to the loan modification process, see Fannie Mae's Why Understanding Debt Is Essential.

Getting Help From a Lawyer or Housing Counselor

In some circumstances, getting an attorney to help you in the modification process is worthwhile. For instance, if you're having difficulty understanding what you need to do to complete your application, the servicer violates loss mitigation laws, or your servicer isn't responding to you, you might want to talk to a lawyer.

If you can't afford a lawyer, a legal aid organization or HUD-approved housing counselor might be able to help you for free. But don't hire a loan modification company.

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