Press the value of your home | Mortgage refinancing
Instead of refinancing your mortgage, a lender can agree to new terms that reduce your monthly payment to an amount you can better afford, according to the Consumer Financial Protection Bureau. Known as a loan modification, the agreement can extend the number of years you have to repay the loan, lower your interest rate, postpone or delay your payment (forbearance), or reduce your principal balance.
According to the Experian credit bureau, a loan modification is for those who are struggling to keep up with mortgage payments and are looking for ways to avoid foreclosure. To benefit from a modification, a borrower must be able to demonstrate that their financial situation has changed significantly, making it difficult to pay the agreed amounts.
While different lenders have different requirements for loan modifications, Experian says that for the most part, to qualify, you must have at least one regular mortgage payment overdue or show that default on a payment is imminent.
You will also likely have to prove significant financial hardship. This can include long-term illness or disability, death of a family member (and loss of income), being affected by a natural or declared disaster, loss of uninsured property, sudden increases in housing costs (including increases in property taxes or homeowners association fees); and divorce.
A lender might be inclined to modify your loan, as this can help avoid the expense of foreclosing and reselling your property in the event of a default. A HUD-certified counselor can help you argue your case or connect you with free or low-cost legal help.
Getting legal help can improve your chances of getting a change. Someone who knows the process will help you organize the necessary paperwork and prepare you to answer any questions the lender will ask you.
One of the downsides to a loan mod, according to Experian, is that it will likely have a negative impact on your credit. But the credit bureau says it will be less severe than a foreclosure. If a mortgage loan modification works as expected and allows you to stay in your home and resume your regular mortgage payments on time, you will be in a good position to start rebuilding your credit.
There is another, less common use of the term “loan modification,” McBride says.
“It’s when the lender offers the benefit of a lower rate while retaining the term of the existing loan, thus preventing the borrower from potentially refinancing with a competitor,” he says. “These are little known and little used, mainly because only lenders who have the loan on their books have the freedom to make these adjustments. Most lenders sell their loans to government sponsored entities like Fannie Mae or Freddie Mac or to investment pools so this is not something they can offer.