How does a mortgage loan modification work?

If you’re facing foreclosure or can’t make your mortgage payments, modifying your mortgage is a convenient option if you need mortgage relief. It can be a temporary or permanent way to avoid losing your home, but it does come with some drawbacks. (iStock)

If you are unable to keep up with your mortgage payments and you find yourself stumbling down the road to foreclosure, you know how nerve-racking it can be. Fortunately, it is possible to get some relief by checking out a mortgage loan modification. It’s a great option for lowering your monthly mortgage payments, saving money, and putting an end to those annoying collection calls.

But loan modification is not for everyone. Sometimes the cost of your loan will go up and your credit report could suffer. But, if your house is foreclosed, your credit report will suffer anyway. Here’s what you need to know about loan modification and how it works.

How mortgage loan modification works

Modifying your mortgage is a temporary or permanent way to avoid foreclosure. Unlike mortgage refinancing, a mortgage loan modification does not replace your current mortgage. Instead, it changes your original loan by adjusting the length of your loan, lowering your interest rate, or switching from a variable rate mortgage to a fixed rate mortgage, with, hopefully, better conditions.

If you have a loan owned or guaranteed by Freddie Mac or Fannie Mae, you may be eligible for the “Flex Modification” program. The goal of the Flex program is to reduce your mortgage payments by 20%.

However, if you still believe that mortgage refinancing is the perfect personal finance option for you, head to the Credible multi-lender site to compare rates and mortgage lenders. Find your prequalified rates today by inserting simple information into Credible’s tools.

WHAT TO DO IF YOU CANNOT MAKE MONTHLY MORTGAGE PAYMENTS

Is Modifying a Mortgage a Good Idea?

A mortgage modification can be a good option:

  • If you can’t qualify for mortgage refinance
  • If you are several months behind in your mortgage payments
  • If you are facing long-term difficulties and are likely to fall behind on mortgage payments

Credible can help you calculate the numbers. In just three minutes, you can get prequalified rates from multiple mortgage lenders without affecting your credit score. See how much refinancing could save you instead.

WHAT TO DO AT THE END OF YOUR MORTGAGE ABSENCE

Due to COVID-19, moratoriums on foreclosures of single-family homes and evictions of real estate will continue until at least December 31, 2020. What will you do January 1, 2021? Before committing to modifying your mortgage, use an online mortgage refinance calculator to determine your new monthly fees.

Who is eligible for a mortgage modification?

Mortgage modification programs vary from lender to lender and not everyone is eligible. Generally, you must provide proof of financial hardship for one or more of the following reasons:

  • Increased cost of housing
  • Natural disaster
  • Long-term disability or sudden illness
  • Loss of income due to the death of a family member
  • Loss of uninsured property
  • Separation or divorce
  • Health pandemic
  • Your mortgage has not been changed more than three times in the past

But if you’re still not sure if the mortgage modification is right for you, visit Credible to learn more about your mortgage refinancing options.

MORTGAGE REFINANCES ARE ON THE GROWTH – HERE’S WHY YOU SHOULD APPLY NOW

How can I change my mortgage?

While not everyone qualifies for a mortgage modification, if you do, there are several key ways you can modify your mortgage.

  • You can extend the term of your mortgage, say from 15 years to 30 years.
  • You can change the type of loan – from an adjustable rate mortgage to a fixed rate mortgage.
  • You can add any overdue amount to the outstanding principal balance. This amount will then be amortized over the new term of your loan.
  • Reduce your interest rate permanently or temporarily.

If you want to compare a mortgage modification to a refinance option, go to Credible. Refinancing also lowers your monthly payment (if you get a lower interest rate), so you need to weigh the pros and cons before making a decision. Check out different types of loans and save money today.

MORTGAGE REFINANCING VS. LOAN MODIFICATION: WHICH IS BEST?

Advantages and disadvantages of mortgage modification

Modifying a mortgage is not without its risks, but it also has key benefits if you qualify.

Advantages

  • You can avoid foreclosure and stay in your home
  • You can settle any late payment
  • You may be able to reduce your monthly payments
  • Your credit will be less affected than if your lender had foreclosed on your home
  • You may be able to switch from a variable rate mortgage to a fixed rate mortgage for the duration of your loan.

The inconvenients

  • You can actually pay more over time if you go for a 20 year loan over a 30 year loan.
  • What you end up owing in your loan modification program can end up being more than the value of your home.
  • You will likely have to pay fees to modify your loan.
  • You can incur tax debts.
  • Your credit score will suffer if your lender reports your modification as a debt settlement.
  • If you continue to make late payments or no payments on your loan modification, your lender may escalate your home foreclosure.

If you are considering modifying your mortgage, check out Credible first to see loan options between several lenders with fewer forms to fill out.

REFINANCE YOUR MORTGAGE BEFORE IT BECOMES MORE EXPENSIVE

About Hannah Schaeffer

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