Should I stop paying my mortgage so I qualify for a loan modification?

Question

Right now I can afford my monthly mortgage payments on my home, but I probably won’t be able to in the near future. I read on the Internet that I should stop making payments on my loan so I could qualify for a loan modification and avoid a foreclosure. Is this right? Do I really need to stop paying my mortgage in order to get a modification?

Answer

No, you don’t! That is outdated advice that, if followed, can lead to some very serious negative consequences. (This is covered in more detail below.)

Back in the day it was common for mortgage servicers to recommend that you fall behind in payments—even if you could afford to make them—if you wanted to get a mortgage modification. While it’s true that in the past lenders would only consider giving homeowners a mortgage modification if they were in default on their loan, this is no longer the case. Now, you can be current on your mortgage payments and still qualify for the vast majority of modification programs.

What is a Mortgage Modification?

A modification is a permanent restructuring of the mortgage where one or more of the terms of the loan are changed so that the payments become more affordable. For example, the lender may agree to reduce the interest rate or extend the repayment term to achieve this goal. (Learn more in Nolo’s article What's the difference between a loan modification, forbearance agreement, and repayment plan?)

Getting a Mortgage Modification While You’re Current on Payments

Most modification programs require that you show you are in danger of falling behind in payments, but you don’t have to actually go into default, in order 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 (you're facing "imminent default") and meet other eligibility criteria. (Flex modifications are available to borrowers who have Fannie Mae and Freddie Mac owned 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. To learn more about this modification program, see The Fannie Mae and Freddie Mac Flex Modification Program for Homeowners: What You Should Know.)

What You’ll Need to Show to Get a Modification

To be eligible for a mortgage modification if you're up to date on payments, you’ll typically need to show that:

• the home is your primary residence
• you've gone through a financial hardship (for example, you had to take a lower paying job or you went through a divorce), and
• that you have enough steady income to make payments under a modification.

Downsides to Deliberately Falling Behind on Mortgage Payments

If you deliberately default on your mortgage payments, there will be several negative consequences for you.

Your credit score will drop. After you miss a payment or multiple payments, your credit score will drop. Once your score falls, it can be difficult to refinance your mortgage, obtain a car loan, or get new credit cards. Even if you subsequently complete a mortgage modification, this will not change previous adverse reporting. (Learn more about how a modification affects your credit score.)

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. This can add up quickly. Once you fall behind, the lender can charge late fees, inspection fees, and various other charges associated with the delinquency. (Learn more about the fees your lender can charge if you fall behind in payments.)

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

Contact Your Mortgage Servicer

In general, you should contact your servicer as soon as you think you may be in danger of missing a payment if you want to apply for a modification of your home mortgage. But if you can afford to continue making your monthly payments, you should continue doing so. In all likelihood, you will be eligible for a mortgage modification even if you're current, so long as you meet all other qualifications and submit all of the required paperwork. (Learn more about how to apply for a modification in Nolo’s article How to Get a Mortgage Loan Modification.)

If you need help applying for a modification or have further questions about the process, consider contacting a HUD-approved housing counselor.