A mortgage modification agreement may help you if you are in financial trouble and risk losing your home. The most important thing for you to do is learn what options are available.
- What is a mortgage modification agreement?
- How does a mortgage modification work?
Then take action by collecting your financial records, gathering your mortgage documents, reaching out to a HUD-approved counselor, and calling your bank.
What is a Mortgage Modification Agreement?
A mortgage modification agreement is an agreement between a borrower and the lender to change the terms of an existing loan. The bank may agree to change the interest rate, length of repayment, or type of loan if the homeowner has a serious financial hardship.1
What are the types of loan modifications?
Loan modifications commonly come in three types. Interest rate reduction, loan extension, and principal deferment are the common modifications that banks may agree to. A bank will agree to this arrangement because they risk the solvency of the loan. If you are not in imminent danger of defaulting, they will not do this, because any of these will increase their risk.
Interest Rate Reduction
An interest rate reduction is one common way a lender will modify an underwater loan. In most cases, the lender will agree to this as long as the lost income from lost interest will be added to the principal of the loan.
A loan extension is a type of modification that changes the length of the loan. Lengthening the term of mortgage helps a buyer by reducing the monthly payment. Banks are likely to agree because they will still get the full payment for the loan. The reason a bank will be reluctant is that this arrangement increases their risk.
Principal deferment is a loan modification that allows the borrower to lower the amount of principal paid each month. The unpaid principal accumulates, and the borrower must pay it as a lump sum when the loan’s term is due. This can be a problem from some homeowners, but for most people, the balance will be paid when they sell their house.
Difference Between a Loan Modification and Refinancing
The difference between a loan modification and refinancing is that the former changes the terms of an existing loan, while the latter pays off the loan and replaces it with another. If you struggle to make your payments you should consider refinancing first, because:
- You can shop around for more favorable terms
- It is a permanent solution to the problem
- The process is straightforward and usually takes less time and stress
However, refinancing requires good credit. If you are already behind on your payments, or you have other credit issues you may not be able to. In this case, it is always best to be honest with your bank about your situation and negotiate a settlement that will benefit both of you.2
How does a loan modification work?
A loan modification works by changing the terms of your loan so that you can continue to pay your debt and the bank does not need to foreclose. Remember that these are for people who are behind and cannot meet the payments. If you are still solvent on your loan you should consider a refinance first.
Each lender has its own qualifications you must meet for a mortgage modification. However, Fannie Mae and Freddie Mac use a program called the Flex Modification that can give you some guidelines for other institutions’ qualifications.3
- Be 60 days or more delinquent
- Submit a borrower response package
- Have an eligible mortgage on the property which is your primary residence
- Your mortgage originated 12 months or more before the evaluation date
- The mortgage has not been modified three or more times
- You have not failed a Flex Modification Trial Period Plan within twelve months
These are some of the guidelines that Freddie Mae and Freddie Mac require. Other lenders will have their own, probably similar, guidelines. If you are behind you should contact your lender immediately to see what your options are before foreclosure.
How to Apply
How to apply for a mortgage modification is straightforward. The important thing is to follow these steps as soon as possible. The longer you wait to get help the worse the options are.4
- Get your financial records together and list your income and expenses
- Find your last complete mortgage statement with your loan number and account balance
- Call a HUD-approved counselor that can help you understand how to negotiate with your bank
The most important thing to remember is to take action quickly when you know you have a financial problem. The earlier you act the better your chances of keeping your home.
Everyone gets into financial binds sometimes. So, don’t think that you are alone or be discouraged because you are having trouble. There is help available. We recommend that you begin by calling a credit counselor, but your bank has programs too. Your lender does not want you to fall behind and lose your house either. They would rather find a way for you to keep paying your loan than foreclose on your house. Prepare to honestly tell them your financial situation, and then don’t be afraid to ask for help.